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Lloney  and  banking 


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MONEY  AND  BANKING 


BT 

WILLIAM  A.  SCOTT,  Ph.D. 

Director  of  the  Course  in  Commerce  and  Professor  of  Political  Economy 
in  the  University  of  Wisconsitt 


FOURTH  EDITION:  REWRITTEN, 
REARRANGED  AND  ENLARGED 


NEW  YORK 

HENRY  HOLT  AND  COMPANY 

19  lO 


Copyright,  1910, 

BY 

HENRY  HOLT  AND  COMPANY 


CAMBLOT    PKESH,   444-46    FEAHL    STRKET,    NEW    YOKX 


PiiEFACE 

The  present  edition  of  Money  and  Banking  has  been  pre- 
pared with  two  primary  purposes  in  view:  firstly,  the  pre- 
sentation of  a  fuller  treatment  of  the  subject  of  banking, 
especially  of  the  banking  systems  of  the  chief  countries  of 
the  world,  than  was  given  in  previous  editions,  and  secondly 
the  rearrangement  and  restatement  of  portions  of  the  sub- 
ject matter  of  previous  editions.  To  these  ends  the  entire 
book  has  been  rewritten  with  the  exception  of  Chapters  I, 
II,  III,  XVI  and  XVII  which,  with  slight  modifications,  are 
reprints  of  Chapters  I,  II,  III,  XIV  and  XV  of  the  old 
editions.  Chapters  VI,  X,  XI,  XII,  XIII,  XIV  and  XV 
are  entirely  new,  and  Chapters  IV,  V,  VII,  VIII,  and  IX 
embody  the  substance  of  Chapters  IV,  V,  VI,  VII,  VIII, 
IX,  XI,  XII  and  XIII  of  former  editions  with  modifications, 
rearrangements  and  considerable  new  material. 

Additions  have  been  made  to  the  references  so  as  to  in- 
clude recent  books,  but  no  attempt  has  been  made  to  give 
complete  bibliographies  of  the  subjects  treated.  The  refer- 
ences have  been  selected  with  the  needs  of  American  students 
primarily  in  view.  As  in  previous  editions  those  at  the 
close  of  the  chapters  are  sometimes  abbreviated,  full  titles 
being  given  in  the  Appendix.  When  an  author's  name  with- 
out title  is  given,  reference  is  made  to  the  first  book  listed 
under  the  name  in  the  Appendix. 

In  the  preparation  of  this  edition  the  author  has  re- 
ceived valuable  assistance  from  his  colleague.  Professor 
Richard  T.  Ely,  and  from  his  former  students.  Professors 
R.  H.  Hess  and  G.  D.  Hancock,  now  Professors  respect- 
ively in  the  Universities  of  Minnesota,  and  Washington  and 
Lee. 

Wm.  a,  Scott. 

University  of  Wisconsin. 
July,  1910. 


CONTENTS 


Chapter  I 
THE  NATURE  AND  FUNCTIONS  OF  MONEY 

PACK 

1.  The  Standard  of  Value 2 

2.  The  Medium  of  Exchange 6 

3.  Credit  as  a  Medium  of  Exchange 11 

4.  The  Relation  Between  the  Standard  of  Value  and  the 

Medium  of  Exchange 13 

Chapter  II 

THE  MEDIUM  OF  EXCHANGE:  ITS  CHARACTERISTICS 
AND  COMPOSITION,  AND  THE  RELATION  BETWEEN 
ITS  CONSTITUENT  ELEMENTS 

1.  The  Importance  of  an  Accurate,  Convenient,  and  Safe 

Currency 14 

2.  Characteristics  of  a  Good  Currency 16 

3.  The  Composition  of  Modern  Currencies 18 

4.  Gresham's  Law 24 

5.  Standard  and  Subsidiary  Coins 28 

6.  The    Concurrent    Circulation    of    Metallic    and    Paper 

Money , 30 

Chapter  III 

THE   STANDARD  OF  VALUE  AND  PRICES 

1.  The  Unit  of  Value  and  Prices  Defined 32 

2.  The  Relation  between  the  Standard  of  Value  and  Prices  33 

3.  Primary  and  Secondary  Standards 34 

4.  Characteristic  Features  of  Standards  of  Value 37 

5.  The  History  of  Standards  and  Units  of  Value 40 

6.  The  Importance  of  Stability  of  Value  in  the  Standard.  .  43 

7.  Difficulty  of  Securing  a  Stable  Standard  of  Value...  46 

8.  The  Interpretation  of  Prices 46 

V 


vi  Contents 


Chapter  IV 
THE  VALUE  OF  THE  STANDARD 

PAGE 

I.  Demand  for  the  Primary  Standard 50 

3.  supplt  of  the  standard  commodity 56 

3.  The  Value  of  Secondary  Standards 58 

4.  The  Quantity  Theory 61 

Chapter  V 

THE  ELEMENTS  OF  THE  MEDIUM  OF  EXCHANGE 

1.  The  Purpose  and  Importance  of  Coinage 66 

2.  Units  of  Value  and  Methods  of  Reckoning 69 

3.  The  Size,  Weight  and  Fineness  of  Coins 73 

4.  The  Naming  and  Stamping  of  Coins 74 

5.  Seigniorage 75 

6.  Inconvertible  Government  Notes 79 

7.  Convertible  Government  Notes 81 

Chapter  VI 

CREDIT 

I.  Meaning  of  the  Term 93 

a.  The  Advantages  of  Credit , 93 

3.  Credit  Instruments 95 

4.  The  Foundations  of  Credit 99 

5.  Credit  and  Prices 103 

Chapter  VII 

BANK  CURRENCY 

1.  Origin  AND  Development  OF  Banking  Institutions 105 

2.  Deposits 108 

3.  Loans  and  Discounts io8 

4.  Deposits  as  Currency 109 

5.  Bank  Notes no 

6.  The  Advantages  of  Bank  Currency iii 


Contents  vii 


Chapter  VIII 

CLEARINGS  AND  THE  EXCHANGES  page 

1.  Local  Exchanges ii6 

2.  OuT-oF-TowN  Exchanges 117 

3.  Bankers'  Balances 120 

4.  The  Balance  of  Indebtedness  between  Communities.  .  .  121 

5.  The  Rate  op  Exchange 123 

6.  Foreign  Exchanges 125 

Chapter  IX 

THE  REGULATION  OF  COMMERCIAL  BANKING 

1.  Incorporation 131 

2.  Capital  and  Surplus 132 

3.  Double  Liability  of  Stockholders 134 

4.  Regulation  of  Investments 134 

5.  Regulation  of  Reserves 138 

6.  Regulation  of  Note  Issues 141 

7.  Public  Inspection  and  Supervision 145 

8.  Importance  of  Honesty,  Wisdom,  and  Discretion  in  Bank 

Officials 150 

Chapter  X 

BANKING  IN  THE  UNITED  STATES 

1.  The  Earliest  Banks 153 

2.  The  First  United  States  Bank 155 

3.  State  Banks  in  the  Period  1791  to  1811 157 

4.  The  Period  1811  to  1816 159 

5.  The  Second  United  States  Bank 160 

6.  The  Establishment  of  the  Independent  Treasury  System.  162 

7.  The  Growth  and  Reputation  of  State  Banks 163 

8.  Origin  AND  Development  of  the  National  Banking  System  176 

9.  State  Banking  since  the  Civil  War 185 

Chapter  XI 
BANKING  IN  CANADA 

1.  Epochs  in  the  History  of  Canada 191 

2.  Early  Conditions 192 

3.  The  First  Banks 194 

4-  Restraining  Influences  on  Banking  Excesses 197 

5.  The  Experiment  with  Free  Banking 200 

6.  Steps  Toward  the  Uniform  Regulation  of  Banking.  . .  202 


viii  Contents 

PAGE 

7.  The  Issue  of  Provincial  Notes 204 

8.  The  British  North  American  Act  of  1867  in  its  Relation 

TO  Banking 205 

9.  The  Bank  Acts  of   1870  and  1871 209 

10.  The  Decade   1870  to   1880  and  the  Revision  of   1880...    211 

11.  The  Decade   1880  to   1890  and  the  Revision  of  1890...    214 

12.  Recent  History 218 

Chapter  XII 

BANKING  IN  ENGLAND 

1.  The  Early  History  of  the  Bank  of  England 220 

2.  Country  Banking  and  the  Act  of   1826 221 

3.  The  First  Banks  of  Deposit 223 

4.  Discount  Brokerage  as  a  Special  Branch  of  Banking.  224 

5.  The  Bank  Act  of  1844 225 

6.  The  Joint  Stock-Banks  and  Concentration 229 

7.  The  Present  Functions  of  the  Various  Groups  of  Bank- 

ing Institutions  doing  Business  in  England 230 

Chapter  XIII 

BANKING  IN  FRANCE 

1.  Origin  and  Early  History  of  the  Bank  of  France.  .  .  .    238 

2.  Banking  in  the  Provinces 242 

3.  Effects  of  the  Revolution  of   1848 243 

4.  The  Bank  of  France  since   1848 245 

5.  Other  Banking  Institutions  since   1848 249 

6.  The  Present  Position  of  the  Bank  of  France 253 

Chapter  XIV 
BANKING  IN  GERMANY 

1.  The  Period  Preceding  1848 257 

2.  The  Period   1848  to   1870 259 

3.  The  Period  1870  to  the  Present  Day 261 

4.  Mortgage  and  Cooperative  Banks 267 

5.  The  Present  Organization  of  the  Banking  Business  in 

Germany 270 

Chapter  XV 
THE  MONEY  MARKET 

1.  The  Central  Markets 273 

2.  The  Central  Reserves 274 

3.  Bank  and  Market  Rates 276 


Contents  ix 

PAGE 

4.  Bank  Notes  and  the  Money  Market 281 

5.  Peculiarities  of  the  New  York  Market 282 

6.  Some  Peculiarities  of.  the  London  Market 287 

7.  Some  Peculiarities  of  the  Paris  Market 289 

8.  Some  Peculiarities  of  the  Berlin  Market 292 

Chapter  XVI 
THEORY  OF  BIMETALLISM 

1.  The  Nature  and  Purpose  of  Bimetallism 296 

2.  The    Bimetallists'    Arraignment    of    the    Monometallic 

System 299 

3.  The  Compensatory  Action  of  the  Double  Standard....  300 

4.  The  Weak  Points  in  the  Theory  of  Bimetallism    303 

5.  National  and  International  Bimetallism 308 

Chapter  XVII 
THE   HISTORY  OF  BIMETALLISM 

1.  Early  European  Experience 310 

2.  Currency  Reform  in  England  AND  the  Act  OF  1816 315 

3.  Bimetallism  in  France  to   1865 318 

4.  Bimetallism  in  the  United  States  to   1873 325 

5.  The  Fall  in  the  Value  of  Silver  after  1875 330 

6.  The  Latin  Union 334 

7.  Bimetallism  in  the  United  States  since   1873 336 

8.  The  International  Conferences 338 

9.  The  Present  Status  of  Bimetallism 342 

Appendix  I 
LIST  OF  REFERENCES 347 

Appendix   II 
STATISTICAL  TABLES 

A.  Statistics  of  the  Production  of  the  Precious  Metals.  363 

B.  Statistics  of  Coinage  in  the  United  States 363 

C.  Statistics  of  Coinage  in  France 365 

D.  Surplus   of   Imports   of   Gold   and   Silver   into   British 

India 3^^ 

E.  Annual  Average  Rates  of  Discount  of  the  Banks  of 

France  and  Germany 3^9 

Appendix   III 
THE  PAR  OF  EXCHANGE  AND  GOLD  POINTS  OF  THE  CHIEF 
CENTERS  OF  FOREIGN  EXCHANGE 37° 

INDEX 371 


MONEY   AND    BANKING 

CHAPTER  I 
THE  NATURE  AND  FUNCTIONS  OF  MONEY 

Money  is  one  of  those  terms  which  political  economists 
have  borrowed  from  popular  speech  and  found  ill-adapted 
to  their  purposes.  In  spite  of  numerous  attempts  to  make 
a  suitable  definition,  it  still  lacks  the  precision  and  definite- 
ness  of  meaning  which  should  characterize  scientific  termi- 
nology. Popular  usage  is  tolerably  consistent  and  clear, 
but  fails  to  include  under  the  term  all  the  instrumentalities 
which  belong  together  in  any  scientific  treatment  of  the 
subject,  and  political  economists  are  not  agreed  regarding 
the  point  to  which  the  popular  meaning  of  the  term  should 
be  extended.  Even  if  these  difficulties  were  removed,  how- 
ever, one  not  easy  to  overcome  would  still  remain.  All  are 
agreed  that  under  the  head  money  we  must  include  both 
the  standard  of  value  and  the  medium  of  exchange,  two 
instrumentalities  which  perform  very  different  functions, 
and  the  distinction  between  which  is  apt  to  be  minimized, 
if  not  entirely  overlooked,  when  an  attempt  is  made  to 
include  them  under  one  definition. 

In  order  to  avoid  this  difficulty  and  to  promote  clear- 
ness of  thinking,  we  shall  discuss  first  of  all  the  functions 
of  the  standard  of  value,  and  the  medium  of  exchange,  and, 
so  far  as  possible,  defer  the  use  of  the  term  money  until 
the  student  is  prepared  to  form  an  independent  judgment 
regarding  the  meaning  which  ought  to  be  attached  to  it. 


2  Money  and  Banking 

I.  The  standard  of  value. — A  standard  of  value  is  any 

commodity  by  means  of  which  people  measure  and  express 
the  value  of  other  commodities.  For  example,  when  we 
say  that  a  pair  of  shoes  is  worth  five  dollars  and  a  coat 
ten,  we  measure  and  express  the  value  of  these  two  com- 
modities by  means  of  another  which,  for  this  purpose,  we 
call  a  dollar.  In  the  United  States  this  standard  commodity 
is  gold,  and  to  23.22  grains  of  it,  many  years  ago,  Con- 
gress gave  the  name  dollar.  If  our  ancestors  had  ac- 
quired the  custom  of  comparing  the  value  of  everything 
with  that  of  a  bushel  of  wheat,  by  always  finding  out  for 
how  many  bushels  each  article  would  exchange,  then  wheat 
would  have  been  our  standard  of  value,  and  Congress 
might  have  decided  to  call  a  bushel  of  wheat  a  dollar,  in- 
stead of  a  few  grains  of  gold. 

The  acquisition  of  the  habit  of  using  some  one  com- 
modity as  a  standard  of  measurement  and  a  means  of  ex- 
pressing the  values  of  all  others  is  characteristic  of  every 
people  who  have  advanced  beyond  the  most  primitive  stages 
of  civilization,  and  is  explained  by  the  need  for  a  common 
language  .of  value,  which  made  its  appearance  very  early 
in  the  history  of  commerce  and  which  demanded  satis- 
faction before  trade  could  play  an  important  part  in  eco- 
nomic processes.  This  need  may  be  best  appreciated  by 
imagining  ourselves  reduced  to  a  state  of  barter.  Each  one 
would  then  be  ol)liged  to  trade  the  commodity  or  service 
which  is  the  result  of  his  special  activity  directly  for  the 
various  commodities  and  services  which  he  needs  or  de- 
sires. A  shoemaker  would  needs  exchange  shoes  directly 
for  flour,  butter,  sugar,  meat,  etc. ;  the  farmer  would  have 
to  barter  wheat  and  cattle  for  groceries,  clothes,  and  agri- 
cultural implements ;  the  laborer  would  have  to  trade  his 
services  for  whatever  he  and  his  family  need,  etc.,  etc. 
The  difficulties  which  would  be  encountered  under  these 


The  Nature  and  Functions  of  Money  3 

circumstances  are  many,  but  one  of  the  greatest  and  the 
most  fundamental  would  be  due  to  the  fact  that  each  per- 
son would  have  a  language  of  values  peculiar  to  himself 
and  difficult  of  comprehension  by  his  fellows.  This  difficul- 
ty may  be  illustrated  as  follows  : — 

Suppose  that  A  is  a  producer  of  wheat,  B  a  cattle-breeder, 
C  a  shoemaker,  D  a  tailor,  and  E  a  manufacturer  of  sugar. 
Each,  having  frequently  bartered  his  product  for  each  of 
the  other  commodities,  would  have  an  accurate  idea  of 
their  relative  values,  but  would  be  able  to  express  that 
idea  only  in  terms  of  his  own  commodity.  A,  for  example, 
would  think  and  speak  of  value  in  terms  of  wheat.  If  he 
had  frequently  traded  100  bushels  of  wheat  for  an  ox,  5 
bushels  for  a  pair  of  shoes,  10  bushels  for  a  coat,  and  i-io 
of  a  bushel  for  a  pound  of  sugar,  the  figures  100,  5,  10, 
and  i-io  would  represent  to  him  the  relative  values  of 
these  and  serve  as  a  means  of  expressing  them.  If,  on 
other  occasions,  he  were  compelled  to  give  1 10  bushels  of 
wheat  for  the  same  sort  of  ox  as  before  cost  him  only  100, 
he  would  conclude  that  the  value  of  beef  had  risen,  and 
would  measure  the  rise  by  comparing  the  figures  100  and 
no.  In  fact,  this  method  of  expressing*  values  would  not 
only  be  natural  to  A,  but  it  would  be  the  only  one  possible. 
On  the  assumption  that  he  produces  wheat  and  wheat  only, 
and  barters  it  for  whatever  else  he  needs  or  desires,  his 
knowledge  of  values  would  not  extend  beyond  the  ratio  of 
exchange  of  wheat  with  other  commodities. 

B,  C,  D,  and  E  would  each  likewise  have  one  means 
and  only  one  of  expressing  the  relative  values  of  com- 
modities, namely,  the  figures  which  represent  the  ratio  of 
exchange  of  his  product  with  each  of  the  others,  B,  for 
example,  might  express  the  value  of  wheat,  shoes,  coats. 
and  sugar  by  the  fractions  i-ioo,  1-20,  i-io,  and  i-iooo, 
the  portions  of  an  ox  exchangeable  respectively  for  a  bushel 


4  Money  and  Banking 

of  wheat,  a  pair  of  shoes,  a  coat,  and  a  pound  of  sugar, 
or  by  the  figures  lOO,  20,  10,  and  1000,  representing  the 
number  of  bushels  of  wheat,  pairs  of  shoes,  coats  and 
pounds  of  sugar  exchangeable  respectively  for  one  ox. 
C's  expression  for  the  relative  values  of  wheat,  cattle, 
coats,  and  sugar  would  be  the  figures  1-5,  20,  2,  and  1-50, 
representing  the  number  of  pairs  of  shoes  and  fractions 
of  pairs  exchangeable  respectively  for  a  bushel  of  wheat, 
an  ox,  a  coat,  and  a  pound  of  sugar,  or  the  figures  5,  1-20, 
1-2,  and  50  representing  the  amount  of  wheat,  cattle,  coats, 
and  sugar  equivalent  in  value  respectively  to  one  pair  of 
shoes.  Under  the  same  conditions  of  value,  D  who  has 
only  coats  for  trading,  would  have  to  pay  for  a  bushel  of 
wheat  I- 10  of  a  coat,  for  an  ox  10  coats,  for  a  pair  of 
shoes  1-2  a  coat,  and  for  a  pound  of  sugar  i-ioo  of  a  coat; 
and  E,  who  barters  sugar,  would  pay  for  a  bushel  of  wheat 
10  pounds,  for  an  ox  1000,  for  a  pair  of  shoes  50,  and  for 
a  coat  100. 

It  is  thus  evident  that  in  a  state  of  barter  each  man 
would  have  an  accurate  numerical  expression  for  the  values 
of  all  the  commodities  on  the  market,  but  one  peculiar  to 
himself,  and  consequently  unintelligible  to  others,  or  at  any 
rate  capable  of  being  made  intelligible  to  others  only  by  a 
mathematical  calculation.  In  describing  values  A  could 
only  give  the  amount  of  wheat  each  commodity  is  worth ; 
B,  the  amount  of  beef  or  live  cattle;  C,  the  number  of  pairs 
of  shoes;  D,  the  number  of  coats;  and  E,  the  amount  of 
sugar.  If  a  dealer  should  attempt  to  establish  in  this  com- 
munity a  store  for  the  purchase  and  sale  of  all  the  goods 
produced,  he  would  be  obliged  to  quote  the  price  of  each 
article  in  terms  of  all  the  others  in  order  to  meet  the  needs 
of  his  customers.  Were  commerce  at  all  active  and  large 
in  amount,  this  would  mean  an  interminable  price-list  and 
an  amount  of  calculation  which  would  require  more  time 


The  Nature  and  Functions  of  Money  5 

than  all  the  other  business  of  the  establishment,  to  say  noth- 
ing of  the  liability  to  error  and  the  consequent  danger  of 
loss.  It  is  safe  to  say  that  under  such  conditions  commerce 
would  never  have  assumed  very  great  proportions  or  played 
a  very  important  role  in  the  world's  history.  The  difficulty 
which  these  traders  have  met  is  that  of  a  variety  of  meth- 
ods of  expressing  values,  and  the  remedy  is  the  acquisition 
of  a  method  common  to  all.  The  difficulty  is  similar  to 
that  which  people  speaking  different  languages  would  meet 
in  trading,  if  no  one  understood  the  speech  of  the  other. 
Each  trader's  language  of  value  is  peculiar  to  himself  and 
not  understood  by  his  fellows.  What  is  needed  is  a  com- 
mon language  intelligible  to  all. 

The  acquisition  of  such  a  language  is  accomplished 
through  the  use  of  a  single  commodity  as  the  standard  for 
comparing  and  reckoning  values.  In  our  hypothetical  com- 
munity, for  example,  any  one  of  the  five  commodities  could 
be  used  for  this  purpose.  On  the  assumption  that  sugar 
is  consumed  by  every  one  and  consequently  frequently  bar- 
tered for  every  other  commodity,  each  person  would  know 
the  value  of  his  product  in  terms  of  this  one,  and  would 
be  able  to  express  that  value  in  a  form  intelligible  to  others. 
If  A  should  always  describe  the  value  of  his  wheat  by  stat- 
ing the  number  of  pounds  of  sugar  a  bushel  would  buy, 
and  B,  C,  and  D  in  the  same  manner  should  express  the 
value  of  cattle,  shoes,  and  coats,  each  would  readily  under- 
stand the  other,  and  comparisons  and  calculations  of  values 
would  be  easy  and  simple.  The  figures  in  which  such  com- 
parisons and  calculations  were  expressed  would  always  refer 
to  multiples  or  subdivisions  of  a  pound  of  sugar,  and  would 
constitute  a  language  of  value  understood  by  every  member 
of  the  community.  If,  in  discussions  of  value,  for  conve- 
nience or  any  other  reason,  a  special  name  were  given  to  a 
pound  of  sugar,  for  example,  the  name  dollar,  franc,  mark, 


6  Money  and  Banking 

or  pound  sterling,  the  language  of  value  would  become  that 
employed  in  the  United  States,  France,  Germany,  or  Eng- 
land at  the  present  day. 

The  capacity  to  serve  as  a  standard  of  value  is  pos- 
sessed by  all  commodities  which  are  widely  used  and  con- 
sequently frequently  bought  or  sold.  In  primitive  societies 
custom  has  usually  caused  the  selection  of  that  commodity  as 
the  standard  which  is  most  widely  known  and  most  highly 
esteemed  among  the  people  who  have  occasion  to  trade  with 
each  other,  and  in  more  highly  civilized  communities  con- 
siderations of  convenience  and  economy  have  usually  dic- 
tated the  selection  of  one  among  several  articles  which 
might  conceivably  be  employed  for  this  purpose.  What- 
ever the  commodity  may  be,  however,  and  by  whatever  pro- 
cess selected,  its  function  as  a  standard  is  simply  that  of 
furnishing  the  community  with  a  means  of  measuring,  ex- 
pressing, comparing,  and  recording  the  values  of  the  va- 
rious articles  of  commerce. 

2.  The  medium  of  exchange. — The  phrase  medium  of 
exchange  describes  a  group  of  instrumentalities  which  serve 
as  a  go-between  in  commercial  transactions.  In  the  United 
States,  it  includes,  gold,  silver,  nickel,  and  copper  coins, 
several  varieties  of  government  notes,  bank-notes,  checks 
and  drafts,  bills  of  exchange,  and  several  other  kinds  of 
documents  less  commonly  used.  Each  of  these  is  appro- 
priately called  a  medium  of  exchange  because  it  is  used  as 
a  go-between  in  the  exchange  of  commodities.  For  ex- 
ample, suppose  a  farmer  brings  butter  and  eggs  to  market, 
and  wishes  to  exchange  them  for  groceries.  In  all  proba- 
bility he  will  not  make  the  exchange  directly,  but  through 
the  medium  or  by  the  mediation  of  coins;  that  is,  he  will 
trade  his  butter  and  eggs  for  coins  and  then  trade  the 
coins  for  groceries.  A  laborer  wishes  to  exchange  several 
days'  work  for  a  coat,  but  he  will  rarely  find  a  tailor  who 


The  Nature  and  Functions  of  Money  7 

needs  his  services,  and  who  will,  therefore,  be  able  and 
willing  to  trade  a  coat  directly  for  a  certain  number  of  days' 
work.  Instead  he  will  trade  his  services  with  some  one 
who  needs  them  for  coins  or  government  notes  or  bank- 
notes or  both,  and  then  trade  the  coins  or  notes  for  the  coat. 
It  is  possible,  and  it  often  happens,  that  a  considerable 
period  of  time  intervenes  between  the  first  trade  and  the 
last.  The  farmer  may  sell  his  produce  a  whole  year  or 
even  longer  before  he  trades  the  coins  or  notes  received  for 
other  commodities.  Indeed,  he  may  never  himself  com- 
plete the  trade,  but  transfer  the  right  so  to  do  to  some  one 
else.  In  any  case  the  coins,  notes,  or  other  documents  re- 
ceived will  be  used  in  buying  other  things  and  will  thus  ful- 
fil their  mission  as  a  medium  of  exchange.  In  the  same 
way  people  use  checks,  drafts,  bills  of  exchange,  and  va- 
rious other  documents. 

Like  the  standard  of  value,  the  medium  of  exchange 
owes  its  existence  to  certain  wants  which  were  felt  very 
early  in  the  history  of  commerce,  and  upon  the  satisfaction 
of  which  further  progress  depended.  These  wants  are 
three  in  number,  namely :  that  for  some  means  of  exchang- 
ing commodities  of  unequal  value,  that  for  some  means  of 
accumulating  wealth  in  such  a  form  as  to  make  it  avail- 
able at  any  time  for  the  purchase  of  any  and  all  com- 
modities, and  that  for  facilities  for  borrowing  and  lending. 

The  first  of  these  may  be  illustrated  as  follows:  A 
farmer  has  an  ox  for  sale  and  desires  a  pair  of  shoes.  He 
may  succeed  in  finding  a  man  who  has  shoes  for  sale  and 
wants  beef,  but  the  ox  is  worth  twenty  pairs  of  shoes  and 
he  wants  but  one,  and  very  likely  the  shoemaker  wants 
only  a  few  pounds  of  beef  instead  of  a  whole  ox.  Mani- 
festly the  trade  cannot  take  place  unless  the  farmer  is  will- 
ing to  take  nineteen  pairs  of  shoes  which  he  does  not 
want  and  the  shoemaker  twenty  times  as  much  beef  as 


8  Money  and  Banking 

he  wants,  or  unless  the  farmer  is  willing  to  kill  his  ox, 
to  hand  over  to  the  shoemaker  an  amount  of  beef  equal 
in  value  to  the  shoes  and  to  keep  the  remainder.  Of  course 
there  might  be  other  people  in  the  community  quite  willing 
to  take  the  beef  which  neither  the  farmer  nor  the  shoe- 
maker wants,  but  that  would  not  help  the  matter  unless 
these  traders  should  happen  to  want  the  various  commod- 
ities which  their  neighbors  might  be  willing  to  give  in  ex- 
change for  it.  On  the  assumption  that  the  farmer  wants 
only  a  pair  of  shoes  and  the  shoemaker  only  a  few  pounds 
of  beef,  the  willingness  of  other  people  to  buy  the  surplus 
might  not  improve  the  situation. 

The  need  of  some  means  of  accumulating  wealth  is  ob- 
vious. Frugal  people  wish  to  make  preparations  for  the 
future,  and  if  the  aggregate  of  their  products  exceeds  that 
of  their  consumption,  they  are  able  so  to  do,  provided  some 
means  of  saving  exists.  The  most  obvious  one  which  sug- 
gests'itself  is  that  of  hoarding  surplus  products,  but  this  is 
a  very  precarious  method  in  case  the  products  in  question 
are  perishable,  or  are  subject  to  frequent  fluctuations  in 
value  or  are  so  bulky  that  the  process  of  hoarding  them  is 
very  expensive.  Most  of  the  ordinary  products  of  in- 
dustry are  subject  to  one  or  more  of  these  contingencies. 
Hence,  in  the  absence  of  some  special  provision  for  the 
accumulation  of  wealth,  the  risks  involved  are  so  great  as 
to  prevent  saving  on  any  large  scale. 

The  need  of  facilities  for  borrowing  and  lending  is 
equally  obvious.  A  farmer  may  have  no  accumulations  to 
tide  him  over  the  period  during  which  his  crops  are  grow- 
ing, or  he  may  wish  to  keep  his  produce  for  a  rise  in  price, 
or  he  may  wish  to  extend  his  agricultural  operations  by 
more  fully  stocking  his  farm,  by  the  use  of  superior  imple- 
ments, or  by  the  cultivation  of  more  acres.  In  any  one  of 
these  cases  he  needs  to  borrow,  and  inability  so  to  do  might 


The  Nature  and  Functions  of  Money  9 

seriously  interfere  with  his  prosperity.  In  an  advanced  in- 
dustrial community  there  are  always  people  quite  compe- 
tent successfully  to  carry  on  industrial  operations,  who  do 
not  possess  the  requisite  capital,  and  many  people,  on  the 
other  hand,  who  have  capital  but  do  not  wish  to  engage  in 
industry.  Facilities  for  borrowing  and  lending  are  needed 
to  bring  these  two  classes  together  for  their  mutual  profit 
and  that  of  the  community.  This  need  might  equally  well 
be  illustrated  by  the  case  of  a  really  sound  business  man 
who  has  temporarily  met  with  misfortune,  or  by  that  of  a 
young  man  capable  of  profiting  by  an  education  but  lacking 
the  funds  necessary  for  its  acquisition,  or  by  many  other 
situations  which  will  readily  occur  to  the  student  upon 
reflection. 

Let  us  now  inquire  how  a  medium  of  exchange  satisfies 
these  wants.  Our  assumed  case  of  the  farmer  and  the  shoe- 
maker will  assist  us.  It  will  be  remembered  that  these 
two  persons  found  difficulty  in  exchanging  their  products 
on  account  of  the  wide  difference  in  value  between  the  far- 
mer's ox  and  a  pair  of  shoes.  If,  in  the  community  to 
which  these  two  traders  belonged,  there  had  been  some  one 
durable  commodity  which  was  an  object  of  universal 
desire  and  consequently  daily  bought  and  sold  and  sure  to 
be  in  general  demand  in  the  future,  the  way  out  of  their 
difficulty  would  have  been  easy.  Even  though  he  might 
not  have  wanted  it  for  his  own  consumption,  the  farmer 
would  have  been  quite  willing  to  accept  this  commodity 
in  payment  for  the  balance  due  him  from  the  shoemaker, 
simply  because  he  would  have  been  able  to  trade  it  at 
any  time  for  anything  he  might  chance  to  want.  The  shoe- 
maker, likewise,  would  not  have  been  seriously  inconve- 
nienced by  the  surplus  beef,  provided  he  had  been  able  to 
sell  it  to  his  neighbors  for  this  highly  exchangeable  com- 
modity.    By  way  of  illustration  let  us  suppose  that  gold 


10  Money  and  Banking 

is  a  commodity  well  known  and  highly  valued  by  every 
member  of  the  community  and  considered  so  very  precious 
that  no  one  doubts  the  continuance  of  its  value  and  high 
estimation  through  future  generations.  Being  very  dur- 
able and  possessing  great  value  in  small  bulk,  it  can  be 
easily  kept  for  any  length  of  time,  and,  on  account  of  the 
belief  in  the  continuance  of  its  value,  every  one  feels  safe 
in  keeping  it  by  him,  and  is  confident  that  at  any  time  in 
the  future  he  can  dispose  of  it  for  whatever  he  may  desire 
or  need.  Being  also  readily  divisable,  it  is  easy  to  ar- 
range for  equivalents  of  almost  any  value.  Under  these 
circumstances,  then,  the  farmer  would  have  been  quite  will- 
ing to  sell  his  ox  for  the  pair  of  shoes  and  the  balance 
in  gold,  and  the  shoemaker  would  have  been  willing  to 
sell  to  his  neighbors  in  exchange  for  gold  the  beef  which  he 
did  not  want,  neither  one  perhaps  intending  to  consume  the 
gold  itself,  but  being  confident  of  his  ability  to  exchange  it 
at  any  time  for  whatever  he  might  chance  to  desire.  Since 
other  traders  under  similar  circumstances  would  follow  the 
example  of  the  farmer  and  the  shoemaker,  all  the  members 
of  the  community  would  speedily  acquire  the  habit  of  tak- 
ing gold  in  exchange  for  their  produce,  even  when  they  did 
not  need  it  for  consumption,  because  they  could  exchange- 
it  for  whatever  they  might  chance  to  want  at  any  time  more 
easily  than  their  own  product.  When  any  commodity 
comes  to  be  generally  used  in  this  way,  it  becomes  by  that 
fact  a  medium  of  exchange. 

In  our  illustration  the  medium  of  exchange  obviated  the 
difficulty  of  exchanging  two  commodities  of  unequal  value, 
namely,  an  ox  and  a  pair  of  shoes.  It  is  evident  that  it 
might  also  be  used  as  a  means  of  accumulating  wealth,  and 
also  for  facilitating  borrowing  and  lending.  Being  by  its 
very  nature  a  commodity  which  every  person  is  willing  to 
take  at  any  time  in  exchange  for  his  goods,  no  risk  would 


The  Nature  and  Functions  of  Money        ii 

be  involved  in  hoarding  it;  and  people  who  had  succeeded 
in  accumulating  it  could  loan  it  to  others  who  needed  for 
any  purpose  to  make  immediate  purchases  and  lacked  the 
means.  The  people  discussed  in  our  illustration  would  nat- 
urally keep  their  savings  in  the  form  of  a  hoard  of  gold. 
The  various  commodities  of  their  own  production  or  manu- 
facture being  perishable  and,  perhaps,  of  uncertain  value 
and  consequently  incapable  of  being  hoarded,  would  be  ex- 
changed for  gold,  which  could  be  kept  without  loss  and 
readily  sold  for  other  commodities  whenever  desired.  This 
hoarded  gold  could  also  be  loaned  to  others  who  need  to 
make  immediate  purchases  but  lack  the  means.  In  this 
case,  of  course,  some  guarantee  that  the  gold  would  be 
returned  when  wanted  would  have  to  be  given,  but,  granted 
the  requisite  degree  of  confidence  between  man  and  man, 
the  gold  would  make  possible  the  loan  with  all  of  its  con- 
ceivable advantages  to  both  borrower  and  lender. 

3.  Credit  as  a  medium  of  exchange. — The  three  wants 
which  we  have  been  considering  are  frequently,  and  at  the 
present  time  commonly,  satisfied  by  means  of  credit  instru- 
ments in  one  form  or  another.  The  methods  of  employing 
these  instrumentalities  as  a  medium  of  exchange  are  vari- 
ous, but  only  the  simplest  one  can  be  appropriately  explained 
at  this  point.  Modern  commercial  processes  are  conducted 
by  means  of  a  large  class  of  middlemen  who  intervene 
between  exchangers  and  relieve  them  of  the  greater  part 
of  the  work  involved  in  trading  their  products.  Among 
these  are  shopkeepers  who  purchase  goods,  giving  the  sellers 
credit  on  their  books  for  the  value  of  their  sales,  and  sell 
them  again  at  such  times  and  in  such  amounts  as  are  de- 
sired, debiting  buyers  with  the  amounts  of  their  purchases. 
Inasmuch  as  the  buyers  and  the  sellers  are  frequently  the 
same  persons,  these  merchants  are  a  means  of  overcoming 
the  difficulties  of  barter  discussed  in  the  preceding  section, 


12  Money  and  Banking 

and  their  book  accounts  serve  as  a  medium  of  exchange. 

By  way  of  illustration  let  us  suppose  that  a  primitive 
community  has  already  acquired  a  standard  of  value,  and 
that  some  very  reliable  person,  in  whose  integrity  and 
wealth  everybody  has  perfect  confidence,  establishes  a  gen- 
eral store,  and  agrees  to  buy  from  the  producers  everything 
they  have  for  sale  and  to  sell  these  same  commodities  to 
others  at  such  times  and  in  such  quantities  as  are  desired. 
After  the  harvest  A  brings  his  wheat  to  the  store  and  re- 
ceives credit  on  the  books  of  the  storekeeper  for  the  amount 
agreed  upon,  this  amount  being  stated  in  terms  of  the  pre- 
vailing standard.  Subsequently  he  purchases  various  com- 
modities, such  as  sugar,  shoes,  coats,  meat,  etc.,  and  is 
debited  by  the  storekeeper  with  the  amounts  of  his  pur- 
chases, these  amounts  being  likewise  stated  in  terms  of  the 
standard.  It  is  evident  that  the  difficulty  involved  in  ex- 
changing commodities  of  unequal  value  is  not  here  met, 
because  it  is  not  necessary  that  A's  account  should  balance 
on  the  occasion  of  every  purchase  or  sale.  It  is  also  evi- 
dent that  A  could  accumulate  his  savings  in  the  form  of 
credit  on  the  storekeeper's  books,  and  could  borrow  by 
overdrawing  his  account;  that  is,  by  accumulating  an  un- 
covered debit  balance.  In  this  case  the  book  account  serves 
precisely  the  same  purposes  as  the  gold  in  our  previous  il- 
lustration. It  obviates  the  difficulty  of  exchanging  com- 
modities of  unequal  value,  and  it  furnishes  a  means  of 
making  savings  and  of  borrowing  and  lending. 

At  first  sight  there  does  not  seem  to  be  much  resemblance 
between  this  primitive  storekeeper  and  the  great  merchants 
and  bankers  of  the  present  day.  But  as  a  matter  of  fact 
they  are  performing  the  same  functions  as  he,  and  by  means 
of  more  complicated  machinery  they  are  using  credit  of 
substantially  the  same  sort  as  he.  Like  his,  their  book 
accounts  satisfy  the  three   fundamental   wants  which  we 


The  Nature  and  Functions  of  Money        13 

have  been  discussing  and  which  are  felt  by  all  traders  how- 
ever primitive  or  advanced. 

4.  The  relation  between  the  standard  of  value  and  the 

medium  of  exchange. — Though  the  functions  of  the  stand- 
ard of  value  and  the  medium  of  exchange  are  quite  dis- 
tinct, they  may  be  performed  by  the  same  commodity.  In 
a  primitive  community  this  is  usually  the  case,  because  uni- 
versal exchangeability,  a  quality  essential  to  both,  is  rare- 
ly possessed  by  more  than  one  commodity,  and  that  one, 
therefore,  must  necessarily  serve  in  both  capacities.  At  the 
present  time,  however,  the  standard  of  value  is  only  one 
element  of  a  very  complex  medium  of  exchange,  consisting 
of  several  commodities  and  a  considerable  number  and  va- 
riety of  credit  instruments.  Why  this  is  so  will  be  made 
clear  in  the  two  following  chapters. 

REFERENCES 

The  topics  included  in  this  chapter  are  discussed  in  most  textbooks 
under  the  head  "The  Functions  of  Money,"  but  they  are  rarely  treated 
in  such  a  way  as  to  show  the  true  relation  between  money  and  the 
fundamental  wants  of  traders,  and  to  emphasize  the  distinction  be- 
tween the  functions  of  the  medium  of  exchange  and  that  of  the  stand- 
ard of  value.  The  following  references  are  typical  of  the  usual  method 
of  treating  the  subject:  Mill,  Political  Economy,  bk.  ill,  ch.  vii; 
Walker,  Money,  ch.  i,  and  Money  Trade,  and  Industry,  chs.  i,  ii,  and 
iii ;  Jevons,  Money  and  the  Mechanism  of  Exchange,  chs.  i,  ii,  and 
iii ;  Nicholson,  Money  and  Monetary  Problems,  pt.  I,  ch.  ii.  In  Laugh- 
lin.  The  Principles  of  Money,  ch.  i  and  in  Menger's  article  entitled, 
"Geld"  in  the  Handworterbuch  der  Staatswissenschaften,  the  subject 
is  well  treated.  See  also  Kinley,  Money,  ch.  v ;  Taylor,  Some  Chapters 
on  Money,  ch.  i ;  Johnson,  Money  and  Currency,  chs.  i  and  ii ;  Knies, 
Das  Geld;  Knapp,  Staatliche  Theorie  des  Geldes,  ch.  i;  and  Nasse, 
"Das  Geld  und  Miinzwesen"  in  Schonberg,  Handbuch  der  politischen 
Oekonomie.  For  a  collection  of  definitions  of  money  see  Roscher, 
Principles  of  Political  Economy,  Lalor's  translation,  v.  i,  bk.  ll,  ch.  iii, 
note  5,  and  Hildebrand,  Theorie  des  Geldes,  p  5. 


CHAPTER  II 

THE  MEDIUM  OF  EXCHANGE:  ITS  CHARACTERISTICS  AND 
COMPOSITION,  AND  THE  RELATION  BETWEEN  ITS 
CONSTITUENT  ELEMENTS 

The  term  universal  exchangeability,  which  we  have  just 
used  to  describe  one  of  the  essentials  of  a  medium  of  ex- 
change, signifies  that  quahty  or  combination  of  quaHties 
which  renders  a  commodity  or  a  credit  instrument  univer- 
sally acceptable  to  people  in  exchange  for  their  goods  or 
services.  In  a  primitive  community  this  quality  or  com- 
bination of  qualities  is  the  capacity  to  satisfy  some  funda- 
mental want  or  wants,  such  as  those  for  food  or  clothing  or 
armor,  but  in  a  more  highly  developed  state  of  society 
certain  credit  instruments  quite  incapable  of  serving  as 
objects  of  general  consumption  possess  universal  exchange- 
ability, and  none  of  the  commodities  which  constitute  the 
medium  of  exchange  enters  into  the  consumption  of  every 
person,  though  all  of  them  are  extensively  used  for  a  va- 
riety of  purposes  and  are  highly  esteemed  by  every  one. 
It  is,  therefore,  evident  that  other  considerations  besides 
the  capacity  to  serve  as  an  article  of  general  consumption 
concur  in  the  selection  of  the  constituent  elements  of  the 
modern  medium  of  exchange.  Among  these,  accuracy,  con- 
venience and  safety  in  commercial  transactions  are  of  prime 
importance. 

I.  The  importance  of  an  accurate,  convenient,  and  safe 
currency. — The  kmd  of  accuracy  which  we  must  here  con- 
sider is  that  which  concerns  the  acquisition  of  the  exact 
equivalent  for  a  commodity  sold  or  the  giving  of  an  exact 
equivalent  of  a  good  bought.     Many  other  kinds  of  ac- 

14 


The  Medium  of  Exchange  15 

curacy  are  of  the  first  importance  in  business,  but  this 
only  is  significant  in  the  present  connection.  As  compared 
with  former  times,  commerce  is  nowadays  conducted  on  a 
large  scale  and  with  small  margins.  The  difference  between 
the  buying  and  the  selling  price  is  often  so  small  that  a  few 
cents  added  or  subtracted  in  each  transaction  mean  riches 
or  ruin  to  a  large  concern.  Hence  it  is  absolutely  neces- 
sary that  very  close  calculations  be  made,  and  that  these 
calculations  be  realized  in  the  commercial  transactions 
which  follow.  Inasmuch  as  practically  every  trade  involves 
the  use  of  the  medium  of  exchange,  this  being  the  universal 
equivalent  given  for  goods  bought  and  received  for  goods 
sold,  it  is  evident  that  this  medium  must  be  of  such  a  charac- 
ter as  to  render  possible  the  transfer  from  buyer  to  seller  of 
the  exact  amount  agreed  upon.  Otherwise  the  closest  and 
most  careful  calculations  might  be  of  no  avail. 

The  importance  of  a  convenient  currency  may  be  appre- 
ciated by  considering  the  disadvantages  which  the  use  of 
a  medium  consisting  of  a  single  element  such  as  gold  or 
silver  would  involve.  For  large  payments  the  weight  of 
the  metal  would  render  transportation  difficult,  expensive, 
and  slow ;  and  for  very  small  payments,  say  of  a  few  cents, 
the  amount  of  metal  would  be  so  small  that  it  could  not 
be  put  into  the  form  of  a  coin  which  would  be  usable, 
and,  if  the  scales  were  necessary  in  every  exchange,  the 
rapidity  absolutely  essential  in  numberless  transactions  of 
everyday  life  would  be  impossible.  Imagine,  for  example, 
the  difficulties  of  travel  and  of  conducting  a  ticket-office  at 
a  busy  railway  station,  if  in  making  small  change  gold  had 
to  be  weighed  and  the  infinitesimal  amounts  preserved  and 
carried  about  by  the  passengers.  Imagine  also  the  expense 
and  inconvenience  which  would  be  involved  in  traveling 
abroad  or  in  taking  long  trips  at  home,  if  one  were  com- 
pelled to  carry  the  amount  needed  for  the  entire  journey 


1 6  Money  and  Banking 

in  the  form  of  gold  or  silver,  as  would  be  the  case  if  one 
of  these  metals  should  constitute  our  only  form  of  cur- 
rency. Indeed  a  convenient  currency  is  quite  as  essential 
to  commerce  as  are  suitable  machines  for  manufacturing, 
locomotives  for  railways,  or  improved  facilities  for  any 
other  business  purpose. 

By  a  safe  medium  is  meant  one  the  use  of  which  does 
not  involve  loss.  It  is  desirable,  therefore,  that  the  value 
which  it  is  the  purpose  of  the  exchangers  to  transfer  should 
l^e  always  and  under  all  circumstances  obtainable  through 
the  currency  by  which  the  exchange  is  accomplished,  and 
that  the  various  elements  of  the  medium  should  be  so  se- 
lected and  manipulated  as  to  protect  merchants  against 
loss  under  all  circumstances.  For  example,  it  is  highly 
desirable  that  a  form  of  currency  should  exist  which  can 
be  sent  through  the  mails  or  by  express  without  subject- 
ing the  parties  concerned  to  loss  in  case  of  accident  to  the 
train  or  the  ship.  So  far  as  possible,  also,  protection 
against  robbers  and  against  the  ordinary  accidents  of  com- 
mercial intercourse  should  be  secured. 

2.  Characteristics  of  a  good  currency. — In  order  to  meet 
the  demands  of  modern  commerce  in  the  respects  which 
have  been  indicated,  the  medium  of  exchange  must  possess 
the  following  characteristics  : — 

A.  It  must  consist  pf  elements  representing  many  grades 
of  value. — In  the  United  States  we  need  means  of  payment 
ranging  in  value  from  at  least  one  cent  to  one  hundred 
thousand  dollars,  and  European  nations  have  found  money 
of  even  smaller  denominations  useful.  By  combination  of 
different  elements  of  the  medium  it  should  be  possible  to 
represent  the  exact  value  of  any  and  every  commodity,  and 
the  exact  amount  of  the  various  payments  necessary  in  com- 
mercial transactions,  and  that,  too,  with  the  greatest  celer- 
ity and  without  difficult  calculations.     If  a  commodity  is 


The  Medium  of  Exchange  17 

worth  twenty-six  dollars  and  thirty-two  cents,  for  example, 
we  should  be  able  to  combine  from  the  constituent  ele- 
ments of  the  medium  exactly  twenty-six  dollars  and  thirty- 
two  cents  of  value.  If  one  should  wish  to  make  a  payment 
of  a  million  dollars,  it  should  be  possible  so  to  do  without 
burdening  oneself  with  a  heavy  load  of  metal  or  running 
the  risk  of  making  mistakes  in  counting. 

B.  It  must  he  easily  and  safely  transportable  in  any  and 
all  amounts. — For  the  purposes  of  modern  commerce  cur- 
rency must  frequently  be  sent  by  mail  or  express  or  freight. 
It  must  be  carried  about  in  people's  pockets  and  portman- 
teaus, and  stored  in  banks,  treasury  vaults,  places  of  busi- 
ness, and  the  houses  of  the  people.  The  material  or  mate- 
rials of  which  it  is  made  are,  therefore,  a  matter  of  great 
importance.  What  is  suitable  for  one  sort  of  currency  is 
quite  unsuitable  for  another.  A  heavy,  bulky  substance 
might  serve  well  for  small  change,  but  would  be  an  ex- 
pensive means  of  making  payments  in  distant  places.  A 
commodity  possessing  great  value  in  small  bulk  would 
answer  well  for  large  payments  and  for  hoarding,  but 
would  be  useless  for  purposes  of  retail  trade  and  for  small 
purchases  generally.  Anything  possessing  high  intrinsic 
value  would  subject  the  owner  to  the  danger  of  loss  in  case 
it  were  sent  through  the  mails  or  by  freight  or  express.  It 
is,  therefore,  evident  that  we  need  in  our  currency  com- 
modities of  different  degrees  of  value  as  well  as  instrumen- 
talities which  possess  little  or  no  intrinsic  worth. 

C.  It  ntust  he  easily  recognized,  durable  and  certain  in 
its  value. — The  various  denominations  of  a  currency  should 
be  recognizable  and  distinguishable  from  each  other  at 
sight.  Otherwise  mistakes  will  be  frequent,  fradulent  prac- 
tices easy,  and  rapidity  in  making  change  impossible.  Met- 
als used  for  currency  purposes  should  be  put  up  in  the 
form  of  coins  with  their  values  plainly  stamped  upon  their 


i8  Money  and  Banking 

faces;  and  the  coins  of  different  denominations  should  be 
distinguishable  by  their  size,  colour,  design,  or  other  easily 
recognizable  features.  The  metals  used  in  the  manufac- 
ture of  coins  should  also  be  capable  of  receiving  and  holding 
an  easily  recognizable  stamp. 

The  fact  that  the  medium  of  exchange  is  used  as  a  means 
of  saving  and  that  it  must  pass  from  hand  to  hand  year  in 
and  year  out  explains  the  need  for  durability.  Any  com- 
modity which  wears  out  readily  would  soon  lose  a  portion 
of  its  value  and  become  worthless  for  further  service  as 
a  medium,  to  say  nothing  of  the  loss,  expense,  and  incon- 
venience involved  in  its  use.  If  it  were  perishable,  it  would 
be  useless  for  purposes  of  hoarding  and  accumulation. 

Absolute  certainty  of  value  is  also  essential  to  a  good 
medium.  If  one  does  not  know  the  exact  value  of  what 
he  is  to  receive  in  payment,  he  will  hesitate  about  selling, 
or  he  will  raise  the  price  of  his  commodities  or  services  in 
a  degree  sufficient  to  recoup  him  for  any  possible  loss  from 
over-estimating  its  value.  A  medium  of  uncertain  value, 
therefore,  is  sure  to  obstruct  trade  and  to  cause  spasmodic 
and  speculative  fluctuations  in  prices. 

The  five  characteristic  features  of  a  good  medium  which 
we  have  just  described  enable  us  to  explain  the  chief  com- 
ponent elements  of  modern  currencies.  Generally  speaking 
it  is  true  that  those  elements  have  survived  and  become 
permanent  parts  of  currency  systems  which  have  proven  to 
be  best  adapted  to  the  ends  they  serve.  Arbitrary  power 
directed  by  ignorance  or  self-interest  has  exerted  an  un- 
favorable influence  here  and  there  and  from  time  to  time, 
but  in  the  long  run  the  necessities  and  the  convenience  of 
the  commercial  world  have  triumphed  in  the  survival  of 
the  fittest. 

3.  The  composition  of  modem  currencies. — The  currency 
of  every  important  commercial  nation  at  the  present  time 


The  Medium  of  Exchange  19 

is  composed  partly  of  metallic  and  partly  of  paper  instru- 
ments. The  metallic  portion  consists  of  coins  and  may  be 
classified  as  follows:  (a)  from  the  standpoint  of  the 
materials  employed  in  its  manufacture,  as  gold  and  silver 
coins  and  those  of  cheaper  metals;  and  (b)  from  the  stand- 
point of  the  relation  between  its  various  elements,  as  stan- 
dard and  subsidiary  coins.  The  paper  portion  may  be 
classified  as  government  currency  and  bank  currency.  The 
currency  of  the  United  States,  for  example,  consists:  (a) 
of  gold  coins  of  the  denominations  twenty,  ten,  five,  and 
two-and-one-half  dollars;  (b)  of  silver  coins  of  the  de- 
nominations one  dollar,  fifty,  twenty-five,  and  ten  cents; 
(c)  of  a  coin  made  of  nickel  of  the  denomination  five  cents ; 
and  (d)  of  a  copper  coin  of  the  denomination  one  cent. 
Our  paper  currency  consists  of  several  varieties  of  notes 
issued  by  the  national  government,  for  example,  of  green- 
backs, Sherman  notes,  silver  certificates  and  gold  certifi- 
cates; of  notes  issued  by  national  banks,  and  of  several  other 
varieties  of  bank  paper,  of  which  checks  and  drafts  are  the 
most  important.  The  currency  of  other  countries  is  sim- 
ilarly constituted,  the  chief  difference  being  due  to  the  ab- 
sence of  government  notes  in  many  of  them. 

A.  The  utility  of  several  varieties  of  coins. — The  first 
characteristic  of  a  good  currency  described  above  explains 
why  we  need  coins  of  different  denominations.  Payments 
of  all  sizes,  both  large  and  small,  are  necessary  and  several 
varieties  of  coins  are  needed  in  order  that  they  may  be 
made  accurately  and  conveniently.  If  the  silver  dollar  were 
the  only  coin  we  possessed,  it  would  be  impossible  to  pay 
for  purchases  of  the  value  of  a  few  cents,  and  accurate 
payments  of  any  size  which  involve  fractions  of  a  dollar 
could  not  be  made.  Moreover,  in  large  payments  the 
weight  of  the  silver  would  be  burdensome  and  expen- 
sive, and  the  counting  of  it  would  require  time  which  the 


20  Money  and  Banking 

existence  of  money   of  large  denominations  might   save. 

The  need  for  coins  of  large  and  small  denominations  ex- 
plains the  use  of  gold,  silver,  and  cheaper  metals  in  their 
manufacture.  Convenience  demands  that  coins  of  large 
denominations  should  be  manufactured  from  some  metal  the 
value  of  which  is  very  high.  For  this  reason,  the  world 
over,  gold  is  used  for  coins  of  higher  denominations  than 
one  dollar.  In  our  country,  as  we  have  seen,  twenty-,  ten-, 
five-,  and  two-and-one-half-dollar  coins  are  of  gold;  in  Eng- 
land the  sovereign  and  half-sovereign  are  made  from  this 
metal ;  in  Germany  the  twenty-  and  ten-mark  pieces,  and  in 
France  the  twenty-  and  ten-franc  pieces.  On  account  of 
its  much  lower  intrinsic  value,  silver  is  well  suited  for  coins 
of  denominations  ranging  from  ten  cents  to  one  dollar. 
Accordingly  England  uses  silver  for  the  manufacture  of 
her  sixpences,  shillings,  florins,  half-crowns,  and  crowns; 
Germany  in  the  manufacture  of  her  five-,  two-,  and  one- 
mark  and  her  fifty-pfennige  pieces,  and  France  in  the  manu- 
facture of  her  five-,  two-,  and  one-franc  and  fifty-centimes 
pieces.  For  coins  of  lower  denominations  than  ten  cents, 
fifty  pfennige  or  fifty  centimes,  silver  is  not  well  adapted, 
because  the  coins  are  so  small  as  to  be  extremely  inconven- 
ient. Holland  has  two  silver  coins  of  lower  denominations 
than  our  ten-cent  piece,  but  they  are  so  tiny  that  they  are 
difficult  to  handle,  easy  to  lose,  and  hard  to  distinguish. 
Experience  has  led  to  the  abandonment  of  such  small  silver 
coins  in  nearly  all  nations,  and  to  the  use  instead  of  copper 
or  bronze  for  the  smallest  coins,  and  of  nickel  for  the  coins 
intermediate  between  the  smallest  and  those  of  about  the 
value  of  our  ten-cent  piece.  The  practice  of  the  great  na- 
tions regarding  these  smaller  coins  is  not  identical  except 
in  the  one  point  that  they  use  metals  cheaper  than  silver 
in  their  manufacture. 

Besides   their    value    several    other   qualities    should    be 


The  Medium  of  Exchange  21 

noted  in  any  attempt  to  give  a  complete  explanation  of  the 
selection  of  gold  and  silver  as  the  chief  monetary  metals  of 
the  world.  Among  these  the  most  important  are  the  dur- 
ability, divisibility,  and  homogeneity  of  these  metals  and 
their  adaptability  to  the  art  of  coinage.  When  slightly 
hardened  by  the  admixture  of  small  quantities  of  other  sub- 
stances, gold  and  silver  coins  will  endure  the  wear  and  tear 
of  modern  commercial  usage  with  but  small  loss  of  sub- 
stance, and  are  but  slightly,  if  at  all,  affected  by  the  atmos- 
pheric elements  which  cause  other  metals  to  rust  and  sub- 
ject them  to  chemical  changes  which  in  time  result  in  their 
complete  destruction.  They  are  also  capable  of  being  re- 
fined to  such  a  degree  and  are  so  easily  divisable  that  coins 
exactly  alike  in  weight,  fineness,  and  form  can  be  made 
from  them.  In  the  form  of  coins  they  can  also  receive  and 
retain  a  stamp  which  is  easily  recognizable.  As  compared 
with  other  metals,  moreover,  the  value  of  gold  and  silver 
has  been  remarkably  steady  throughout  long  periods  of 
time.  In  fact,  no  other  metals  are  known  which  possess  in 
the  same  degree  of  perfection  as  these  the  peculiar  combi- 
nation of  qualities  required  in  the  manufacture  of  coins. 

B.  The  utility  of  paper  currency. — The  characteristic 
feature  of  paper  currency  is  the  fact  that  it  does  not  con- 
tain in  its  own  substance  the  value  expressed  by  the  fig- 
ures or  statements  on  its  face,  but  simply  represents  the 
obligation  of  some  public  or  private  corporation  or  of  some 
person  to  pay  the  amount  indicated.  The  secret  of  its  cir- 
culation has  already  been  suggested.*  If  people  have  entire 
confidence  in  the  ability  and  willingness  of  the  issuing  party 
to  pay  the  obligations  on  demand,  and  if  they  meet  a  real 
currency  need,  they  will  circulate.  The  measures  necessary 
to  secure  and  maintain  the  confidence  of  the  public  in  this 
sort  of  currency  will  be  discussed  under  the  appropriate 
*  Chapter  i,  pp.  ii  and  12. 


22  Money  and  Banking 

heads  in  succeeding  chapters.  We  shall  here  point  out 
simply  its  superiority  for  certain  purposes  over  other  forms 
of  currency. 

The  comparative  inexpensiveness  of  paper  currency  is 
obvious.  It  costs  only  the  value  of  the  paper  and  the  labor 
of  printing.  Compared  with  the  expense  involved  in  the 
mining  and  assaying  of  the  metal  and  in  the  minting  and 
the  wear  and  tear  of  coins  manufactured  from  such  val- 
uable materials  as  gold  and  silver,  this  is  significant,  to  say 
nothing  of  the  loss  involved  in  withdrawing  immense  quan- 
tities of  these  valuable  metals  from  ordinary  consumption. 
When  considerable  sums  need  to  be  transported  from  one 
part  of  the  country  to  another  or  from  one  country  to 
another,  the  economy  of  paper  currency  is  still  more  appar- 
ent. If  it  were  necessary  to  transport  several  millions  of 
dollars  from  Chicago  to  London,  the  express  charges  on  the 
necessary  amount  of  gold  or  silver  would  be  very  high, 
while  a  draft  for  the  amount  can  be  sent  in  a  letter  for 
two  cents. 

While  not  so  obvious,  the  superiority  of  credit  currency, 
under  certain  circumstances,  in  the  respects  of  convenience 
and  safety  is  important.  In  the  making  of  large  payments 
it  is  much  more  convenient  to  write  a  check  than  to  hand  to 
your  creditor  the  requisite  amount  of  gold  or  silver  or  even 
of  bank-notes  or  government  notes,  and  it  is  more  conven- 
ient to  hand  him  bank-notes  or  government  notes  of  large 
denominations  than  coin.  When  one  is  making  a  long 
journey  and  on  this  account  finds  it  necessary  to  carry  on 
his  person  considerable  sums,  he  appreciates  the  superior 
convenience  of  paper  currency.  The  claim  of  superior 
safety  cannot  be  made  for  all  forms  of  credit  paper,  but  it 
can  be  made  for  checks  and  drafts  and  certain  forms  of 
notes  issued  by  express  companies,  postoffice  departments 
of  governments,  etc.     The  loss  of  a  check  or  a  draft  or 


The  Medium  of  Exchange  23 

of  certain  forms  of  money  orders  through  theft  or  other 
means  does  not  involve  the  loss  of  the  sum  indicated  on 
its  face.  Being  made  payable  to  a  definitely  specified  per- 
son, and  careful  records  being  kept  by  the  issuing  parties, 
duplicates  are  obtainable.  Moreover,  the  use  of  credit  cur- 
rency in  its  various  forms  obviates  the  danger  that  would 
otherwise  be  involved  in  carrying  about  large  quantities  of 
gold  and  silver.  The  police  force  of  every  large  city  would 
needs  be  largely  increased  if  the  actual  transfer  of  coin  of 
the  required  value  were  necessary  in  every  transaction. 
Every  railway  and  steamship  company  and  every  private 
mercantile  establishment  would  also  need  to  provide  it- 
self with  heavy  safes  and  a  small  army  of  police  for  pur- 
poses of  protection.  The  temptation  to  robbery  thus  oc- 
casioned would  doubtless  largely  increase  crime,  and  thus 
diminish  the  general  security  of  the  community. 

Certain  forms  of  paper  currency  also  possess  the  very 
desirable  quality  of  elasticity ;  that  is,  the  quantity  in  cir- 
culation automatically  adjusts  itself  to  the  needs  of  com- 
merce, increasing  when  more  money  is  wanted  and  decreas- 
ing when  the  need  that  called  it  into  existence  has  passed 
away.  An  element  of  this  sort  is  essential  to  a  perfect 
currency  because  the  need  for  money  varies  greatly  from 
year  to  year  and  in  different  seasons. 

In  the  United  States  the  needs  of  different  sections  of 
the  country  are  subject  to  seasonal  variations,  and  the 
volume  needed  for  the  entire  nation  is  larger  in  times  of 
great  commercial  activity,  and  smaller  during  periods 
of  depression.  No  one  has  sufficient  foresight  to  be  able 
to  predict  the  degree  of  these  changes,  and  only  occasion- 
ally, as  in  the  case  of  certain  of  them  which  depend  upon 
crop  movements,  can  the  dates  be  even  approximately  fixed. 
It  is  necessary,  therefore,  that  certain  forms  of  currency 
should,  as  it  were  automatically,  move  from  place  to  place, 


24  Money  and  Banking 

and  increase  and  decrease  in  quantity.  As  will  appear  in 
later  chapters,  only  certain  varieties  of  paper  currency 
possess  this  desirable  quality.  The  movements  of  coin  in 
both  the  directions  indicated  are  far  from  automatic,  its 
entrance  into  and  withdrawal  from  circulation  requiring 
considerable  time  and  the  manipulation  of  the  machinery  of 
government. 

The  superiority  of  credit  currency  in  the  respects 
mentioned  accounts  for  its  extended  use  in  all  modern 
commercial  nations,  and  for  its  increasing  use  as  commercial 
operations  grow  in  extent  and  magnitude.  It  must  not 
be  forgotten,  however,  that  its  superiority  is  confined  to 
certain  of  the  uses  of  a  medium  of  exchange,  and  does  not 
extend  to  all.  In  retail  trade  and  for  the  making  of  change 
and  for  small  payments  everywhere  coins  still  excel  in  con- 
venience and  safety,  and  there  is  no  reason  to  expect  that 
their  use  will  ever  cease. 

4.  Gresham's  law. — The  concurrent  circulation  of  metal- 
lic and  paper  currency  and  the  use  of  coins  made  of  differ- 
ent metals  involves  a  difficulty  the  removal  of  which  only 
time  and  long  experience  have  made  possible.  This  diffi- 
culty may  be  illustrated  as  follows:  Suppose  that,  at  the 
time  of  the  minting  of  gold  and  silver  coins,  the  relative 
value  of  these  metals  is  i  to  20 ;  that  is,  one  ounce  of  gold 
is  exactly  equal  in  value  to  twenty  ounces  of  silver,  and 
that  accordingly  twenty  times  the  weight  of  silver  is  used  in 
the  manufacture  of  five  silver  dollars  as  of  gold  in  the  manu- 
facture of  a  five-dollar  gold  piece.  For  example,  suppose 
that  125  grains  of  gold  be  put  into  each  of  the  five-dollar 
pieces  and  500  grains  of  silver  into  each  of  the  one-dollar 
pieces.  Suppose  that  the  proportions  of  the  two  metals 
used  in  the  manufacture  of  all  the  other  coins  be  precisely 
the  same.  Under  these  circumstances  the  market  value  of 
the  metallic  content  of  each  and  every  coin  would  be  exactly 


The  Medium  of  Exchange  25 

expressed  by  the  stamp  on  its  face,  and  five  silver  dollars, 
ten  silver  half-dollars,  and  twenty  silver  quarter-dollars 
would  be  equivalent  in  market  value  to  each  other  and  to  a 
five-dollar  gold  piece.  Let  us  suppose  further  that,  in 
order  to  avoid  all  possibility  of  inconvenience  or  difficulty 
in  the  circulation  of  these  coins,  a  law  is  passed  conferring 
upon  them  the  so-called  legal-tender  quality;  that  is,  decla- 
ring that  in  the  payment  of  debts  and  the  making  of  pur- 
chases of  all  kinds  five  silver  dollars,  ten  silver  half-dollars, 
twenty  silver  quarter-dollars,  and  a  five-dollar  gold  piece 
shall  be  equivalent.  For  a  time  we  may  suppose  that  all 
goes  well,  everybody  giving  and  receiving  indifferently 
gold  and  silver  coins  in  the  proportions  indicated,  the  gold 
coins  being  naturally  used  in  large  payments  and  the  silver 
in  small.  Soon,  however,  the  value  of  one  or  both  of  the 
precious  metals  changes,  so  that  on  the  markets  twenty-five 
ounces  of  silver  instead  of  twenty  are  needed  to  purchase 
an  ounce  of  gold.  What  now  will  happen  to  the  coins 
which  have  been  declared  by  law  equivalent  in  the  making 
of  purchases  and  the  payment  of  debts?  Will  people  con- 
tinue indifferently  to  give  and  to  receive  five-dollar  gold 
pieces  and  five  silver  dollars  in  payments  of  the  amount  of 
five  dollars  ?  Certainly  not.  They  will  sell  the  gold  coins  as 
metal  or  hoard  them  for  future  use,  and  make  their  pay- 
ments in  silver  alone.  If  we  suppose  that  the  majority  of 
people  are  unaware  of  the  change  in  the  value  of  the  metals 
or  through  habit  or  ignorance  continue  indifferently  to  pay 
out  the  gold  and  silver  which  comes  into  their  possession, 
we  may  be  sure  that  the  money-changers  and  the  bullion- 
dealers  will  be  sufficiently  shrewd  and  wide  awake  speedily 
to  drain  the  currency  of  all  of  its  gold. 

The  same  difficulty  may  result  from  the  concurrent  cir- 
culation of  metallic  and  paper  money.  Suppose  that  the 
government  has  issued  notes  in  denominations  of  five,  ten, 


26  Money  and  Banking 

twenty,  fifty,  etc.,  dollars  and  made  them  legal  tender  at 
their  face  value;  that  is,  declared  a  five-dollar  note  equiva- 
lent to  a  five-dollar  gold  piece  or  to  five  silver  dollars  in 
the  payment  of  debts  and  in  all  other  kinds  of  financial 
transactions,  a  ten-dollar  note  to  a  ten-dollar  gold  piece  or 
to  two  five-dollar  gold  pieces  or  to  ten  silver  dollars,  etc., 
etc.  If  the  people  have  perfect  confidence  in  the  govern- 
ment's ability  and  willingness  to  pay,  and  it  is  perfectly  easy 
to  procure  gold  and  silver  coin  with  the  paper  without  loss 
or  difficulty  of  any  kind,  they  will  continue  to  give  and 
to  receive  the  notes  and  the  coins  indifferently;  but  if  they 
should  lose  confidence  in  the  government  or  should  for  any 
reason  prefer  coin,  they  would  avail  themselves,  whenever 
possible,  of  the  advantages  of  the  legal-tender  law  by  pay- 
ing out  their  notes  and  retaining  their  gold  and  silver  for  the 
purpose  of  hoarding  or  in  order  to  sell  them  as  bullion  or 
for  any  other  use  in  which  they  could  realize  their  full 
value.  Under  these  circumstances  it  is  evident  that  coins 
would  speedily  disappear  from  circulation  and  the  govern- 
ment notes  remain  in  full  possession  of  the  field. 

The  difficulty  involved  in  the  disappearance  of  under- 
valued coins  from  circulation  has  been  experienced  over  and 
over  again  in  the  monetary  history  of  the  world  and  in  a 
variety  of  forms.  Now  one  class  of  coins  has  been  removed 
from  circulation  and  now  another,  and  frequently  all  kinds 
of  metallic  money  have  disappeared  before  the  advent  of 
depreciated  paper.  In  the  early  years  of  the  last  century 
our  currency  consisted  exclusively  of  silver,  because  gold 
was  undervalued  at  the  mint.  Later  on,  after  the  discovery 
of  the  gold-mines  of  California  and  Australia,  gold  dimin- 
ished in  value  very  greatly,  and  our  silver  speedily  disap- 
peared from  circulation.  During  our  Civil  War  and  for 
many  years  after  its  close  depreciated  government  notes 
prevented  the  use  of  gold  and  silver  coins  for  monetary 


The  Medium  of  Exchange  27 

purposes.  Sir  Thomas  Gresham,  one  of  the  most  famous 
directors  of  the  English  mint,  formulated  the  experiences 
of  his  time  along  this  line  into  a  law  which  has  ever  since 
borne  his  name.*  Poor  money,  he  said,  always  drives  good 
money  out  of  circulation.  By  poor  money  he  meant  money 
which  was  not  worth  its  face  value,  and  the  process  which 
he  described  as  the  driving  of  the  good  money  out  of  cir- 
culation was  simply  the  disappearance  of  the  coins  of  supe- 
rior intrinsic  value  from  circulation  as  money  because  they 
could  be  more  profitably  used  in  other  ways.  This  so-called 
Gresham's  law  is  simply  the  expression  of  a  universal  ex- 
perience which  has  as  its  cause  the  comirtercial  instinct  com- 
mon to  all  men  and  which  urges  them  to  make  the  most 
of  their  possessions. 

The  operation  of  Gresham's  law  is  always  accompanied 
by  inconvenience  and  loss.  In  the  first  place,  it  renders 
impossible  the  realization  of  the  advantages  of  a  complex 
currency.  If  the  gold  disappears  from  circulation,  the  com- 
munity has  no  coins  suitable  for  the  making  of  large  pay- 
ments. If  the  silver  goes,  it  becomes  difficult  or  impossible 
to  make  small  change.  If  government  paper  drives  all  the 
coin  from  circulation,  the  community  suffers  from  a  com- 
bination of  ills,  which  will  be  described  in  subsequent  chap- 
ters. In  the  second  place,  the  operation  of  Gresham's  law 
interferes  seriously  with  prices. 

When  people  begin  to  make  use  of  their  legal  rights  by 
the  employment  of  the  depreciated  element  in  the  payment 
of  debts,  persons  of  all  sorts  who  have  goods  for  sale  and 
persons  who  are  making  loans  which  are  to  be  paid  back 
in  the  future  will  protect  themselves  against  the  depreciated 
currency  by  raising  the  prices  of  their  goods  to  at  least 

*  This  law  was  discovered  at  least  two  centuries  before  Gresham's 
time,  being  clearly  stated  in  Oresme's  "De  Origine,  Natura,  Jura  et 
Mutationibus  Monetarium"  published  in  the  fourteenth  century. 


28  Money  and  Banking 

the  extent  of  the  depreciation  and  by  so  adjusting  the 
terms  of  the  loan  as  to  avoid  loss.  The  result,  therefore, 
will  be  a  general  rise  of  prices.  If  the  depreciation  be  a 
certain  fixed  amount  which  can  be  readily  calculated,  as 
will  be  the  case  with  a  coin  whose  intrinsic  value  is  less 
than  its  face  value,  the  shock  to  prices  may  be  but  a  single 
one  and  the  new  level  may  be  as  stable  as  the  old.  If, 
however,  the  depreciation  is  more  or  less  uncertain  and  per- 
haps in  part  due  to  speculation,  as  is  liable  to  be  the  case 
with  certain  forms  of  credit  currency,  the  interference  with 
prices  is  liable  to  be  continuous  and  the  new  level  to  be 
very  unstable.  Such  conditions  are  sure  to  breed  specula- 
tion of  the  most  dangerous  sort,  and,  if  long  continued, 
seriously  to  shake  that  confidence  between  man  and  man 
which  is  essential  to  the  maintenance  of  the  credit  system, 
thus  creating  conditions  favorable  to  crises  and  other  forms 
forms  of  commercial  disaster. 

5.  Standard  and  subsidiary  coins. — How  to  prevent  the 
operation  of  Gresham's  law  and  thus  to  avoid  the  evils 
which  it  involves  has  been  a  most  difficult  problem.  Dur- 
ing the  middle  ages  its  solution  was  sought  in  vain,  and 
the  monetary  history  of  every  European  country  during 
several  centuries  exhibits  a  succession  of  fruitless  attempts 
to  retain  in  concurrent  circulation  gold,  silver,  and  copper 
coins  of  the  various  denominations  needed  for  commercial 
and  governmental  purposes.  Finally,  however,  the  solution 
was  found,  and  no  nation  nowadays  needs  to  be  troubled 
by  Gresham's  law.  So  far  as  the  concurrent  circulation  of 
coins  made  of  different  metals  is  concerned,  the  operation 
of  this  law  is  avoided  by  the  device  of  making  certain  of 
the  coins  subsidiary  to  others  which  are  called  standard.  In 
many  countries  at  the  present  day  the  gold  coins  are  the 
standard  ones,  and  all  others  are  made  subsidiary  by  treat- 
ing them  in  the  following  manner : 


The  Medium  of  Exchange  29 

(a)  By  reducing  the  quantity  of  the  metal  in  them  to 
such  an  extent  that  their  intrinsic  value  is  much  below  their 
face  value; 

(b)  By  limiting  the  quantity  of  them  to  the  actual  needs 
of  the  community  for  coins  of  these  particular  denomina- 
tions; 

(c)  By  limiting  their  legal-tender  quality  to  small  sums; 
and 

(d)  By  making  them  redeemable  in  the  standard  coins. 

The  explanation  of  the  efficacy  of  these  measures  is  ob- 
vious. So  long  as  the  silver,  nickel,  and  copper  coins  are 
redeemable  at  their  face  value  in  gold  coins,  no  one  will 
hesitate  to  take  them  at  that  valuation,  no  matter  how 
much  below  it  their  actual  intrinsic  value  may  be.  The 
lowering  of  their  intrinsic  value  by  diminishing  the  amount 
of  metal  used  in  their  manufacture,  therefore,  does  not  pre- 
vent their  circulation  at  par,  but  it  does  prevent  their  dis- 
appearance from  circulation  in  case  of  a  considerable  in- 
crease in  the  market  value  of  the  metal  of  which  they  are 
composed.  For  example,  if  an  ounce  of  gold  is  equal  in 
value  to  twenty  ounces  of  silver,  and  the  five-dollar  gold 
piece  weighs  125  grains  and  the  one-dollar  silver  piece  400 
grains,  the  value  of  the  metal  in  the  silver  dollar  is  worth 
only  eighty  cents.  So  long,  however,  as  the  government 
stands  ready  to  give  a  five-dollar  gold  piece  for  five  silver 
dollars,  each  silver  dollar  will  continue  to  circulate  at  its 
face  value,  and  the  value  of  silver  would  needs  rise  more 
than  twenty-five  per  cent,  before  the  operation  of  Gresham's 
law  would  drive  the  silver  coins  out  of  circulation.  The 
disappearance  of  the  gold  coins  by  the  operation  of  Gre- 
sham's law  and  the  impoverishment  of  the  government  on 
account  of  the  demand  for  the  exch?nge  of  silver  for  gold 
is  prevented  by  the  limitation  of  the  quantity  of  subsidiary 
coins  minted  and  by  making  them  legal-tender  for  small 


3©  Money  and  Banking 

sums  only.  So  long  as  the  quantity  of  such  money  in  cir- 
culation does  not  exceed  the  actual  need  for  it  for  com- 
mercial purposes,  there  will  be  no  disposition  to  demand  its 
redemption,  and  so  long  as  its  legal-tender  quality  is  lim- 
ited, no  one  is  obliged  to  receive  it  in  large  quantities,  and 
consequently  its  general  substitution  for  gold  in  the  cur- 
rency is  rendered  difficult,  if  not  impossible.  Indeed  these 
four  regulations  place  the  control  of  the  substitution  prac- 
tically in  the  hands  of  the  government,  at  the  same  time 
giving  it  the  power  to  prevent  the  operation  of  Gresham's 
law  and  to  protect  itself  against  loss. 

The  laws  passed  by  the  various  nations  for  the  regula- 
tion of  their  subsidiary  currencies  differ  considerably  in 
details,  but  they  all  embody  these  principles.  Special  ex- 
ceptions are  sometimes  made,  as,  for  example,  in  the  case 
of  our  silver  dollars  and  the  five-franc  pieces  formerly 
minted  by  the  states  of  the  Latin  Union,  but  such  excep- 
tions must  not  be  regarded  as  in  any  sense  an  abandon- 
ment of  these  principles  or  a  demonstration  of  their  use- 
lessness.  Oti  the  contrary,  the  unfortunate  experiences 
which  have  usually  followed  attempts  to  make  exceptions 
in  the  application  of  these  principles  have  confirmed  their 
validity  and  demonstrated  the  danger  of  their  violation.* 

6.  The  concurrent  circulation  of  metallic  and  paper 
money. — All  forms  of  paper  money  are  characterized  by 
the  possession  of  the  credit  features  briefly  explained  in  the 
first  chapter.  Each  and  every  one  represents  and  in  some 
way  expresses  the  obligation  of  some  individual,  corpora- 
tion, or  government  to  pay  the  sum  indicated  on  its  face. 
The  intrinsic  value  of  these  notes  is,  of  course,  practically 
nothing.     Why,  then,  do  they  circulate  side  by  side  with 

*  The  reasons  for  mak!.ig  these  exceptions  and  the  unfortunate  ex- 
periences which  have  followed  them  will  be  treated  in  the  chapters  on 
Bimetallism. 


The  Medium  of  Exchange  31 

silver  and  gold  coins  without  displacing  them  or  being  dis- 
placed by  them?  Attempts  to  answer  this  question  have 
probably  given  rise  to  more  controversy  than  any  other  sub- 
ject in  the  range  of  monetary  science,  and  it  is  not  best  in 
this  chapter  to  enter  into  a  discussion  of  the  various 
pertinent  questions;  but  it  is  desirable  to  call  attention  at 
this  time  to  the  fact  that  the  principles  which  we  have  dis- 
cussed in  the  preceding  section  may  be  applied  here.  For 
example,  if  the  paper  money  is  made  redeemable  on  de- 
mand at  its  face  value  in  standard  coins,  it  will  readily  cir- 
culate without  danger  of  depreciation.  If  the  quantity 
issued  does  not  exceed  the  demand  for  it  for  currency  pur- 
poses, and  its  legal-tender  quality  be  limited,  there  will  be 
no  danger  of  its  substitution  for  coin  in  large  quantities  or 
of  the  disappearance  of  coin  from  circulation.  Without 
entering  in  any  way  into  the  discussion  of  controverted 
questions  therefore,  we  may  understand  at  least  one  meth- 
od of  maintaining  in  concurrent  circulation  metallic  and 
paper  currency.  The  application  of  these  principles  to  the 
various  forms  of  paper  currency  issued  by  governments  and 
banks,  and  the  danger  of  their  violation  in  this  case  as  well 
as  in  that  of  silver  and  gold  coins,  will  be  made  clear  in 
the  appropriate  place. 

REFERENCES 

On   Gresham's   law   see   Laughlin,   ch.    xii;   Johnson,   pp.    194-196; 

Kinley,  ch.  iv ;  Jevons,  ch.  viii ;  Nicholson,  Money  and  Monetary  Prob- 
lems, ch.  iv,  and  Political  Economy,  v,  II,  ch.  xiii. 

On  subsidiary  currency  see,  for  a  discussion  of  the  principles  in- 
volved, Laughlin,  ch.  xv;  Nicholson,  ch.  iv;  Mill,  bk.  Ill,  ch.  x;  Nasse, 
ch.  vii;  and  Report  of  the  Monetary  Commission  of  the  Indianapolis 
Convention,  §§  42  to  45. 

For  the  regulations  of  the  various  States  see  Norman,  Complete 
Guide  to  the  World's  Twenty-nine  Metal  Monetary  Systems;  Watson, 
History  of  American  Coinage,  ch.  xxi;  and  Lejeune,  M annates,  Poids 
et  Mesures  des  Principaux  Pays  du  Monde. 


CHAPTER   III 
THE  STANDARD  OF  VALUE  AND   PRICES. 

I.  The  unit  of  value  and  prices  defined. — In  the  first 
chapter  the  standard  of  value  was  defined  as  that  com- 
modity in  terms  of  which  the  values  or  ratios  of  exchange 
of  all  other  commodities  are  expressed.  It  was  also  shown 
that  these  expressions  of  ratios  always  take  the  form  of 
figures  which  represent  multiples  and  subdivisions  of  a  de- 
finite portion  of  the  standard.  The  portion  of  the  standard 
which  is  selected  as  the  basis  of  measurement  is  usually 
given  a  specific  name,  such  as  a  dollar,  a  pound  sterling,  a 
franc,  a  mark,  or  a  lira,  and  is  called  the  unit  of  value. 
The  quantity  thus  selected  is  purely  arbitrary,  as  well  as 
the  name  given  to  it. 

The  technical  term  which  has  been  universally  adopted 
for  the  numerical  expression  of  the  values  of  commodities 
in  terms  of  the  standard  is  price.  When,  for  example,  we 
wish  to  say  that  the  ratio  of  exchange  between  wheat  and 
gold  is  as  one  bushel  of  wheat  to  23.22  grains  of  gold,  we 
say  that  the  price  of  wheat  is  one  dollar  per  bushel,  because 
in  the  United  States  we  have  adopted  23.22  grains  of  gold 
as  our  unit  of  value,  and  have  named  it  one  dollar.  When 
we  wish  to  express  the  fact  that  the  ratio  of  exchange 
between  a  pair  of  shoes  and  gold  is  one  pair  of  shoes  to 
1 16.10  grains  of  gold,  we  simply  say  that  the  price  of  a 
pair  of  shoes  is  five  dollars,  because  1 16.10  is  five  times 
23.22,  our  unit.     In  England  these  ratios  or  prices  are  ex- 

32 


The  Standard  of  Value  and  Prices  33 

pressed  in  terms  of  pounds,  shillings,  and  pence,  in  France 
in  terms  of  francs  and  centimes,  and  in  Germany  in  terms 
of  marks  and  pfennige,  because  these  nations  have  adopted 
these  names  for  their  units  of  value  and  subdivisions  res- 
pectively. 

2.  The  relation  between  the  standard  of  value  and 
prices. — Remembering  that  prices  are  simply  the  numerical 
expression  of  the  ratios  of  exchange  between  every  other 
commodity  and  the  standard  commodity,  we  may  easily 
explain  the  immediate  causes  of  their  fluctuations.  Since 
the  ratio  of  exchange  between  two  commodities  is  simply 
the  relative  quantities  that  exchange  for  each  other,  it  is 
evident  that  this  ratio  will  change  whenever  the  worth  of 
either  of  the  commodities  changes.  If  wheat  is  being  ex- 
changed for  shoes  from  time  to  time,  and  it  becomes  for 
any  reason  more  valuable,  it  will  exchange  for  a  larger 
number  of  shoes;  if  it  becomes  less  valuable,  it  will  ex- 
change for  a  smaller  number.  Likewise  if  shoes  become 
more  or  less  valuable,  the  ratio  of  exchange  with  wheat 
will  change.  By  parity  of  reasoning,  prices,  which  are  the 
expression  of  the  ratio  of  exchange  between  the  standard 
and  commodities,  may  change  from  any  one  of  the  follow- 
ing four  causes  or  from  various  combinations  of  these : 
(a)  from  a  rise  in  the  value  of  the  commodities  the  prices 
of  which  are  in  question;  (b)  from  a  fall  in  the  value  of 
these  commodities;  (c)  from  a  rise  in  the  value  of  the 
standard  commodity;  and  (d)  from  a  fall  in  the  value  of 
the  standard  commodity.  The  first  and  fourth  of  these 
causes  will  result  in  a  rise  of  prices,  and  the  second  and 
third  in  a  fall. 

By  way  of  illustration  of  these  propositions,  let  us  con- 
sider the  possible  causes  of  changes  in  the  price  of  wheat. 
Remembering  that  gold  is  our  standard  and  that  Congress 
has  decreed  that  23.22  grains  of  gold  shall  be  called  a 


34  Money  and  Banking 

dollar,  by  definition  we  know  that  when  wheat  is  a  dollar 
a  bushel,  23.22  grains  of  gold  are  exchanging  on  the  mar- 
kets for  one  bushel  of  wheat.  If  subsequently,  for  any 
reason,  the  value  of  wheat  should  increase,  that  is,  if  people 
should  desire  it  more  intensely,  or  some  new  use  for  it 
should  be  discovered,  or  the  supply  of  wheat  should  be- 
come short,  the  value  of  gold  remaining  unchanged,  the 
price  of  wheat  would  certainly  rise,  since  it  would  require 
more  than  23.22  grains  of  gold  to  purchase  a  bushel.  If 
wheat  had  just  doubled  in  value,  it  would  require  46.44 
grains  to  make  the  purchase;  that  is  to  say,  wheat  would 
sell  for  two  dollars  a  bushel.  If,  on  the  other  hand,  the  value 
of  wheat  should  diminish  one-half,  a  bushel  could  be  pur- 
chased with  one-half  the  former  amount  of  gold,  and  the 
price  of  wheat  would  be  one-half  of  a  dollar  per  bushel.  Re- 
versing the  terms  of  our  illustration,  and  assuming  that 
the  value  of  wheat  remains  unchanged,  and  that  of  gold 
rises  and  falls,  we  obtain  corresponding  results.  When  the 
value  of  gold  rises,  less  gold  will  be  required  for  the  pur- 
chase of  a  bushel  of  wheat,  and  its  price  will  rise.  When 
the  value  of  gold  falls,  more  will  be  required  for  the  pur- 
chase of  a  bushel  of  wheat,  and  its  price  will  rise.  If  both 
wheat  and  gold  were  changing  in  value  at  the  same  time, 
it  is  evident  that  the  result  would  be  either  rising  or  fall- 
ing or  stationary  prices,  according  to  the  direction  and 
amount  of  the  changes.  If  gold  should  fall  in  value  in 
exactly  the  same  degree  and  at  the  same  time  that  wheat 
was  falling,  prices  would  remain  stationary.  If,  on  the 
other  hand,  the  changes  were  in  opposite  directions,  the 
gold  falling  and  the  wheat  rising,  the  rise  in  the  price  of 
wheat  would  be  very  great.  Conversely,  if  gold  were  ris- 
ing in  value  and  wheat  falling,  the  price  of  wheat  would 
fall  very  rapidly. 
3.  Primary  and  secondary  standards. — In  order  to  avoid 


The  Standard  of  Value  and  Prices  35 

confusion  in  the  interpretation  of  prices  it  is  necessary  to 
distinguish  a  special  class  of  value  standards  to  which  the 
adjective  secondary  may  be  applied.  The  commodity  stand- 
ard, the  function  of  which  we  have  described  in  the  pre- 
ceding pages,  may  be  called  primary.  Secondary  stand- 
ards are  based  upon  the  primary  in  the  sense  that  their 
value  is  derived  from  them  and  that  their  independent  ex- 
istence is  impossible.  In  other  words,  a  community  may 
have  a  primary  standard  of  value  without  a  secondary,  but 
cannot  have  a  secondary  standard  without  a  primary. 

Secondary  standards  usually  consist  of  government  notes 
which  have  been  made  legal-tender,  that  is  of  promises  to 
pay,  put  into  circulation  by  the  government,  and  by  law 
made  receivable  for  all  debts  public  and  private.  The  ef- 
fect of  a  legal-tender  law  of  this  sort  is  to  compel  creditors 
to  accept  government  notes  for  the  sums  due  them  and  to 
permit  debtors  to  pay  their  debts  by  presenting  or  tender- 
ing these  notes.  In  succeeding  chapters  we  shall  explain 
how  such  notes  may  take  the  place  of  all  other  forms  of 
money,  and  why  people,  though  compelled  to  accept  them 
for  payments  due,  ordinarily  discount  them,  that  is,  re- 
ceive them  at  less  than  their  face  value.  It  is  discounted  or 
depreciated  notes  of  this  sort  that  become  secondary  stand- 
ards and  in  the  following  manner : — 

Suppose  our  government  were  to  issue  notes  of  the  va- 
rious denominations,  one  dollar,  two  dollars,  five  dollars, 
ten  dollars,  fifty  cents,  twenty-five  cents,  ten  cents,  etc., 
and  by  law  compel  us  to  receive  them  in  all  payments,  the 
notes  containing  upon  their  face  a  printed  statement  to  the 
effect  that  the  government  promises  at  some  not  specified 
future  date  to  pay  to  the  bearer  the  sum  indicated.  Sup- 
pose further  that,  fearing  lest  the  government  might  not 
keep  its  promise  or  that  it  would  be  slow  in  payfng,  or  for 
some  other  reason,  we  should  be  unwilling  to  accept  a  dol- 


36  Money  and  Banking 

lar  note  for  more  than  fifty  cents,  a  two  dollar  note  for 
more  than  one  dollar,  a  ten-dollar  note  for  more  than  five 
dollars,  etc.  The  result  would  be  that  prices  would  be 
doubled  and  these  notes  would  become  a  secondary  stand- 
ard. A  farmer  whose  wheat  is  worth  one  dollar  per  bushel 
would  now  demand  a  two-dollar  note  for  it,  and,  if  these 
notes  constituted  the  only  available  money,  he  would  hence- 
forth quote  his  wheat  at  two  dollars  per  bushel  instead  of 
one,  knowing  that  he  must  receive  these  depreciated  gov- 
ernment notes  in  payment.  When  everybody  had  acquired 
the  habit  of  quoting  prices  in  terms  of  this  depreciated 
paper,  all  prices  would  have  doubled  and  the  government 
notes  would  have  acquired  the  quality  of  a  secondary  stand- 
ard of  value. 

It  should  never  be  forgotten,  however,  that  under  such 
circumstances  the  use  of  the  primary  standard  would  not 
be  discontinued.  It  would  needs  be  constantly  used  to  test 
the  depreciation  of  the  notes  and  in  foreign  exchanges. 
The  expressions  one  dollar,  five  dollars,  fifty  cents,  etc. 
printed  on  the  notes  would  mean  nothing  until  they  were 
referred  to  the  unit  of  value  defined  by  statute  as  a  certain 
amount  of  the  primary  standard.  The  community  would 
have  two  sets  of  prices,  one  quoted  in  terms  of  the  primary 
and  the  other  in  terms  of  the  secondary  standard,  the  dif- 
ference between  the  two  measuring  the  extent  of  the  depre- 
ciation of  the  notes. 

When  a  community  possesses  a  secondary  standard  of 
value  it  is  subject  to  fluctuations  in  prices  from  three  in- 
stead of  two  sets  of  causes,  namely,  from  changes  in  the 
value  of  commodities,  from  changes  in  the  value  of  the 
primary  standard,  and  from  changes  in  the  degree  of  de- 
preciation of  the  secondary  standard.  In  such  a  com- 
munity, even  though  commodities  and  gold  were  relatively 
stable  in  value,   great   fluctuations  in  prices  might  result 


The  Standard  of  Value  and  Prices  7^"] 

from  changes  in  the  degree  of  depreciation  of  the  govern- 
ment notes. 

4.  Characteristic  features  of  standards  of  value, — The 
danger  of  confusing  primary  and  secondary  standards  ren- 
ders desirable  a  more  detailed  account  of  the  characteristics 
of  the  former.  Among  these  the  most  important  are  the 
following : — 

A.  A  high  degree  of  utility  for  purposes  of  ordinary  con- 
sumption.— No  commodity  can  serve  as  a  primary  stand- 
ard of  value  which  is  not  highly  prized  for  purposes  of 
ordinary  consumption,  so  highly  prized  indeed  that  it  is  or 
may  easily  become  an  object  of  universal  desire.  The  truth 
of  this  proposition  rests  upon  two  facts  which  become  self- 
evident  the  moment  one  grasps  the  real  nature  of  a  stand- 
ard. The  first  is  that  people  can  get  into  the  habit  of 
quoting  the  value  of  their  commodities  in  terms  of  some 
one  commodity  only  after  they  have  learned  the  ratios  of 
exchange  between  said  commodities  and  the  one  in  question 
by  means  of  frequent  exchanges.  It  is  manifestly  impos- 
sible to  express  a  ratio  which  you  do  not  know,  and  there 
is  no  conceivable  way  of  knowing  a  ratio  of  exchange  except 
by  actually  making  exchanges  and  observing  the  terms  in 
which  they  are  made.  It  is  equally  evident  that  such  knowl- 
edge could  become  common  only  after  practically  every- 
body had  frequently  traded  his  products  for  the  one  in 
question.  For  convenience  of  expression  we  shall  here- 
after speak  of  a  commodity  for  which  people  generally  are 
anxious  to  trade  their  products  and  services  as  one  pos- 
sessed of  a  high  degree  of  exchangeability. 

The  second  fact  upon  which  the  truth  of  the  proposition 
we  are  defending  rests  is  that  such  general  and  frequent 
trading  of  all  sorts  of  goods  for  some  one  commodity  as  is 
necessary  to  fit  it  for  the  work  of  a  standard  implies  the 
possession  by  said  commodity  of  very  great  utility  for  pur- 


38  Money  and  Banking 

poses  of  ordinary  consumption.  That  every  person  in  a 
community  should  frequently  trade  his  products  or  ser- 
vices for  a  commodity  which  to  him  is  useless  it  is  impos- 
sible to  conceive.  It  is  necessary,  however,  to  emphasize 
the  truth  at  the  very  beginning  of  our  study,  because  the 
failure  to  grasp  it  is  responsible  for  a  great  deal  of  fal- 
lacious reasoning  and  a  number  of  monetary  heresies. 

B.  Serviceability  as  a  medium  of  exchange. — In  primi- 
tive communities  the  same  commodity  serves  both  as  a 
standard  of  value  and  a  medium  of  exchange,  for  the 
reason  that  a  high  degree  of  exchangeability  fits  it  for 
both  services.  With  the  growth  of  commerce,  however,  the 
credit  method  of  conducting  exchanges,  explained  in  the 
first  chapter,  has  come  into  extensive  use,  and  nowadays 
the  medium  of  exchange  everywhere  consists  of  credit  in- 
struments and  a  number  of  different  commodities  besides 
that  which  serves  as  the  standard.  Nevertheless  it  is  still 
important  that  the  standard  should  constitute  an  element 
of  the  medium  of  exchange.  This  becomes  evident  when 
we  recall  the  regulations  necessary  to  maintain  in  con- 
current circulation  several  varieties  of  coins  and  paper  cur- 
rency. As  explained  in  the  preceding  chapter,  subsidiary 
coins  and  paper  currency  must  be  redeemable  directly  or 
indirectly  in  some  one  kind  of  coins,  and  it  is  best  that 
these  latter  coins  should  be  made  from  the  commodity  which 
serves  as  the  standard  of  value.  The  statements  on  the 
faces  of  the  coins  and  notes  in  circulation  always  refer  to 
the  standard  commodity.  A  five-dollar  government  note  or 
bank-note  is  a  promise  to  pay  a  specified  amount  of  this 
commodity;  and  while  the  statements  on  the  faces  of  the 
coins  do  not  formally  constitute  promises  to  pay,  the  figures 
always  refer  to  specific  amounts  of  this  same  commodity; 
and  if  they  circulate  at  the  value  indicated  by  these  figures, 
it  is  because  they  are  either  directly  exchangeable  for  that 


The  Standard  of  Value  and  Prices  39 

specified  amount  of  the  standard  commodity  or  redeemable 
in  an  amount  of  some  other  commodity  exactly  equivalent 
to  this  in  value.  The  difficulty  connected  with  the  redemp- 
tion of  the  various  elements  of  the  medium  in  other  com- 
modities than  the  standard  is  the  fact  that  the  quantity  of 
such  commodities  receivable  in  payment  for  a  ten-dollar 
note  or  a  dollar  or  fifty-cent  coin  would  vary  with  the 
price  of  the  commodities.  Suppose,  for  example,  that  all 
elements  of  the  medium  were  made  redeemable  in  silver, 
gold  being  the  standard  of  value.  When  silver  was  worth 
a  dollar  an  ounce  it  would  take  ten  ounces  to  pay  a  ten- 
dollar  note,  and  when  its  price  was  fifty  cents  an  ounce  it 
would  take  twenty  ounces  to  redeem  the  same  note.  It 
would  always  be  necessary  to  determine  the  price  of  silver 
in  gold  before  the  payment  of  the  note  or  the  redemption 
of  the  coins  could  be  accomplished.* 

When  all  forms  of  currency  are  made  redeemable  in 
the  standard  commodity,  on  the  other  hand,  the  quantity 
payable  for  a  ten-dollar  note  is  unchangeable,  since  ten 
dollars  means  ten  times  the  unit  of  value  called  the  dollar, 
and  this  unit  is  defined  by  law  to  be  a  certain  number  of 
grains  of  gold.  If,  then,  the  standard  commodity  be  put  up 
in  coins  of  convenient  sizes  and  denominations,  it  con- 
stitutes as  nearly  perfect  a  material  for  redemption  as  it 
is  possible  to  obtain.  It  follows  that  a  good  standard  of 
value  must  be  a  commodity  which  possesses  the  qualities 
needed  in  the  manufacture  of  coins,  such  as  durability,  divis- 
ibility, homogeneity,  malleability,  etc. 

♦  The  student  must  not  allow  himself  to  be  deceived  by  indirect  sys- 
tems of  redemption.  We  may  make  notes  redeemable  in  silver  dollars 
at  their  face  value  without  reference  to  their  intrinsic  value,  and  no 
difficulty  will  be  experienced  provided  the  silver  dollars  are  them- 
selves directly  or  indirectly  redeemable  in  gold.  Under  such  a  system 
the  notes  are  really  redeemable  in  gold,  but  by  an  indirect  or  roundabout 
process. 


40  Money  and  Banking 

C.  Capacity  to  be  easily  and  cheaply  hoarded  and  trans- 
ported.— The  extensive  use  of  the  standard  commodity  as 
material  for  redemption  renders  important  its  capacity  to 
be  easily  and  cheaply  hoarded  and  transported.  The  com- 
modity used  for  the  payment  of  notes  and  the  redemption 
of  coins  must  be  frequently  transported  between  different 
countries  and  different  parts  of  the  same  country,  and  the 
question  of  expense  of  transportation  thus  becomes  an  im- 
portant matter.  If  the  redemption  material  is  bulky  and 
of  low  value,  the  expense  of  transportation  will  be  high ; 
if  it  is  very  valuable,  that  is,  possessed  of  a  good  deal  of 
value  in  small  bulk,  these  expenses  will  be  much  lower,  in- 
deed may  be  relatively  insignificant.  In  subsequent  chapters 
we  shall  explain  the  necessity  of  paying  balances  between 
banks  in  the  same  and  different  countries  in  the  standard 
commodity,  and  consequently  the  need  many  banks,  and 
sometimes  the  national  treasury,  feel  for  keeping  large 
amounts  of  this  commodity  on  hand  in  their  vaults.  A 
bulky  commodity  is  much  more  expensive  to  store  than 
one  of  high  value.  It  thus  becomes  evident  that  of  two 
commodities  otherwise  equally  well  fitted  to  serve  as  a 
standard  of  value,  the  more  valuable  one  has  the  advan- 
tage in  the  particulars  just  described.  Great  financial  in- 
stitutions which  are  obliged  to  handle  large  quantities  of 
the  standard  commodity  possess  great  influence  in  the  deter- 
mination of  what  that  commodity  shall  be,  and,  for  the 
reasons  mentioned,  among  others,  are  quite  certain  to  fa- 
vor the  more  valuable  commodity. 

5.  The  history  of  standards  and  units  of  value. — The 
number  and  variety  of  commodities  which  at  various  times 
have  served  as  standards  are  great.  Various  kinds  of  grain, 
rice,  cattle,  salt,  tobacco,  skins  of  animals,  cacao,  and  va- 
rious metals,  of  which  the  most  important  are  lead,  iron, 
copper,  silver,  and  gold  may  be  mentioned.     Of  these,  gold 


The  Standard  of  Value  and  Prices  41 

has  best  endured  the  various  tests,  and  is  now  the  standard 
in  all  the  great  commercial  nations.  Since  commerce  has 
been  playing  an  important  role  in  the  affairs  of  nations, 
silver  has  been  its  only  competitor.  These  two  metals  are 
better  fitted  for  the  work  of  a  standard  in  all  the  respects 
we  have  mentioned  than  any  of  the  other  commodities.  On 
account  of  their  durability,  divisibility,  adaptability  to  the 
coiner's  art,  and  high  value,  they  are  preeminently  fitted 
for  service  as  a  medium  of  exchange,  and  their  great  beauty 
and  consequent  adaptability  to  purposes  of  ornamentation 
made  them  objects  of  universal  desire  very  early  in  the  his- 
tory of  civilization.  Custom  and  law  have  also  long  fav- 
ored them.  The  victory  of  gold  over  silver  in  compara- 
tively recent  times  is  due  chiefly  to  its  superior  value  and 
its  consequent  extended  use  in  international  exchanges  and 
in  the  payment  of  balances  between  banks.  Legislation  has 
also  favored  it,  but  largely  for  this  reason.  It  is  equally 
as  good  as  silver  in  all  other  respects,  and  much  better  in 
this  very  important  one. 

Of  secondary  standards  history  presents  us  with  numer- 
ous examples.  During  the  years  1790- 1796  France  had 
such  a  standard  in  the  depreciated  government  notes  which 
displaced  all  other  forms  of  money  and  which  were  issued 
by  the  Revolutionary  governments  as  a  means  of  meeting 
the  extraordinary  expenses  of  the  time.  During  the  years 
1793-1821  the  notes  of  the  Bank  of  England,  not  being 
redeemable  on  demand  in  coin,  depreciated  and  became  a 
secondary  standard.  So  comparatively  slight  was  the  depre- 
ciation of  the  notes  during  the  greater  part  of  the  period, 
and  so  gradual  their  introduction  as  a  secondary  standard, 
that  many  people  believed  them  to  constitute  the  primary 
standard,  and  a  number  of  theories  in  support  of  this  con- 
tention gained  currency.  During  our  Revolutionary  and 
Civil  wars  depreciated  government  notes  came  into  general 


42  Money  and  Banking 

circulation  as  money  and  served  as  secondary  standards. 
In  all  of  these  instances  silver  or  gold  continued  as  the  pri- 
mary standard,  and  prices  were  commonly  quoted  in  these 
metals  as  well  as  in  the  depreciated  paper. 

The  history  of  units  of  value  is  too  complicated  and  in 
many  cases  too  obscure  to  warrant  any  extended  account 
here.  The  English  pound  sterling  has  probably  had  the 
longest  continuous  history  of  any  of  the  units  of  value  em- 
ployed by  modern  nations.  It  dates  back  at  least  to  the 
later  Saxon  period,  and  probably  still  farther.  The  name 
pound,  however,  has  been  the  only  really  permanent  ele- 
ment. For  many  centuries  it  consisted  of  silver,  but  the 
amounts  which  it  represented  were  repeatedly  diminished 
until  from  a  pound's  weight  it  ultimately  fell  to  a  few 
ounces.  It  was  not  represented  in  the  form  of  a  coin  until 
modern  times.  In  1816  it  was  changed  to  gold  and  has 
remained  unaltered  to  the  present  day.  In  France  the  same 
system  of  reckoning  as  in  England,  with  the  French  names 
livre,  sou,  and  denier  instead  of  pound,  shilling,  and  penny, 
was  employed  until  1795,  when  the  modern  franc  was 
adopted  as  the  unit.  As  in  England,  the  amounts  of  metal 
represented  by  these  names  constantly  diminished,  and 
they  were  even  less  frequently  represented  in  coins.  In 
Germany  the  same  system  with  the  names  pfund,  schilling, 
and  pfennig  was  originally  employed,  but  a  number  of  in- 
dependent and  widely  different  systems  were  developed  in 
the  free  cities  and  independent  principalities  of  the  Middle 
Ages,  and  it  was  not  until  1873  that  the  mark,  consisting  of 
.398247  of  a  gramme  of  gold,  became  the  unit  of  the  whole 
German  Empire.  In  the  United  States  the  dollar  has  been 
the  name  of  the  unit  since  colonial  times.  Up  to  the  estab- 
lishment of  our  own  coinage  system  it  meant  the  Spanish 
milled  dollar,  but  the  act  of  1792  defined  it  in  terms  both  of 
silver  and  of  gold,  the  ratio  between  the  two  being  reckoned 


The  Standard  of  Value  and  Prices  43 

as  15  to  I.  Its  content  in  pure  gold  at  that  time  was  fixed 
at  24.75  grains,  but  in  1834  it  was  diminished  to  2^^.22 
grains,  and  has  remained  unchanged  since  that  date. 

It  is  by  no  means  necessary  that  the  unit  should  be  re- 
presented in  a  coin,  although  it  is  desirable,  as  we  have 
shown,  that  some  coins  should  be  made  from  the  standard 
commodity.  For  example,  though  gold  is  the  standard  of 
value  in  this  country  and  our  unit,  the  dollar,  is  defined  in 
the  statutes  as  23.22  grains  of  pure  gold,  we  do  not  coin 
a  gold  dollar  as  its  representative  for  the  reason  that  it  would 
be  too  small  for  convenient  use.  Our  dollar  coin  is,  there- 
fore, made  of  silver.  The  same  is  true  of  the  present 
French  and  German  units.  While  the  franc  and  the  mark 
are  both  defined  as  a  certain  number  of  grains  of  gold,  the 
coins  designated  by  these  names  are,  for  convenience's  sake, 
made  of  silver.  The  English  pound  sterling,  being  a  very 
large  unit,  is  represented  in  a  gold  coin  called  the  sovereign, 
which  is  of  convenient  weight  and  size  for  purposes  of  gen- 
eral circulation. 

6.  The  importance  of  stability  of  value  in  the  standard. — 
The  vital  part  which  the  standard  of  value  plays  in  the  de- 
termination of  prices  suggests  the  importance  of  stability  of 
value  in  the  commodity  which  is  to  perform  this  function. 
Fluctuations  in  prices  ought,  if  possible,  to  correspond  ex- 
actly with  fluctuations  in  the  value  of  commodities.  If  we 
could  be  perfectly  sure  that  every  change  in  the  price  of  a 
commodity  represents  and  exactly  measures  a  change  in  the 
relation  between  its  demand  and  supply,  producers  would 
be  able  to  determine  with  a  considerable  degree  of  accuracy 
the  results  of  prospective  increases  or  decreases  in  the 
supply  of  their  product,  and  would  thus  secure  a  sound 
basis  for  the  management  of  their  concerns.  Under  these 
circumstances,  too,  political  economists  and  sociologists 
would  be  able  accurately  to  translate  price  statistics  into 


44  Money  and  Banking 

vital  changes  in  our  economic  life,  and  thus  to  trace  causes 
to  their  effects  with  a  certainty  and  a  degree  of  accuracy 
now  unknown.  To  the  extent,  however,  that  changes  in 
prices  are  due  to  fluctuations  in  the  value  of  the  standard, 
an  element  of  uncertainty  is  introduced  into  all  calculations 
based  on  prices.  Without  a  special  investigation,  always 
difficult,  sometimes  impossible,  and  never  accurate,  one  does 
not  know  whether  a  given  change  in  prices  is  due  to  a  cause 
operating  upon  the  commodities  whose  prices  are  under 
consideration,  or  upon  gold.  If  a  manufacturer,  for  ex- 
ample, on  account  of  a  rise  in  the  price  of  his  product, 
which  in  reality  has  been  caused  by  a  fall  in  the  value  of 
gold,  concludes  that  the  demand  for  his  product  has  greatly 
increased,  and,  on  the  basis  of  a  calculation  founded  on 
this  conclusion,  proceeds  to  enlarge  his  factory  and  increase 
his  output,  he  is  quite  sure  to  suffer  loss  and  possible  bank- 
ruptcy. The  increased  supply  of  goods  which  he  throws 
upon  the  market  as  a  result  of  his  mistake  would  really 
not  be  needed  and  he  would  be  obliged  to  sell  them  at  a 
sacrifice.  If  his  loss  should  chance  to  be  great  enough  to 
cause  bankruptcy,  and  if  his  concern  were  a  very  large 
one,  and  connected  in  a  business  way  with  banks  and  other 
large  enterprises,  his  fall  might  carry  others  down  with  him 
in  a  constantly  widening  circle,  and  a  great  commercial 
crisis  be  the  result. 

Uncertainty  in  business  affairs  of  the  kind  we  have  been 
describing  can  only  be  completely  removed  by  a  standard 
whose  value  never  changes;  that  is,  by  one  whose  value  is 
absolutely  stable.  The  proof  of  this  is  the  fact  previously 
stated,  that  outside  of  changes  in  the  values  of  the  com- 
modities themselves,  the  only  cause  of  price  fluctuations  is 
a  change  in  the  value  of  the  standard. 

A  second  reason  for  desiring  stability  of  value  in  the 
standard  commodity  is  the  fact  that  debts  are  nearly  always 


The  Standard  of  Value  and  Prices  45 

measured  and  expressed  in  its  terms.  In  this  country  prom- 
issory notes,  bonds,  stocks,  and  all  contracts  calling  for 
payment  by  one  party  to  another  at  some  future  date  are 
drawn  in  terms  of  dollars  and  cents.  Each  of  these  docu- 
ments contains  the  promise  of  some  individual  or  corpora- 
tion to  pay  some  other  individual  or  corporation  a  specified 
number  of  dollars  at  some  period  in  the  future.  It  is  very 
evident  that  if  these  dollars  change  in  value  before  the  date 
of  maturity  of  the  document,  the  essential  character  of  the 
contract  is  changed.  If  they  rise  in  value,  debtors  must 
pay  more;  if  they  fall,  less.  The  effect  upon  creditors,  of 
course,  is  directly  the  reverse.  For  example,  a  farmer, 
whose  land  is  mortgaged,  must  pay  to  his  creditors  more 
value  than  he  intended  if  the  value  of  the  standard  rises, 
and  less  if  it  falls.  If  the  amount  of  the  mortgage  is  $5000. 
and  the  value  of  the  standard  doubles  before  the  mortgage 
matures,  he  will  be  obliged  to  pay  double  the  amount  of 
value  he  intended  or  an  amount  of  produce  which  would 
have  been  worth  $10,000  at  the  time  the  mortgage  was 
made;  if  the  value  of  the  standard  diminishes  one-half,  the 
mortgagee  will  receive  no  more  than  the  equivalent  of 
$2500  at  the  time  the  mortgage  was  made.  The  mass  of 
indebtedness  at  the  present  time  is  so  enonnous  that  a 
comparatively  slight  change  in  the  value  of  gold  transfers 
millions  from  the  pockets  of  debtors  into  those  of  creditors 
or  vice  versa.  It  sometimes  happens  that  the  people  of  an 
entire  section  of  the  country  are  debtors  to  a  much  greater 
extent  than  creditors  or  vice  versa,  and  hence  that  a  change 
in  the  value  of  the  standard  seriously  interferes  with  the 
prosperity  of  the  entire  community  or  unjustly  enables  one 
region  to  draw  tribute  from  another.  The  interests  of  an 
entire  nation  may  be  dominantly  on  the  side  of  the  creditor 
class  or  the  debtor  class,  and  international  relations  thus 
seriously  affected  by  changes  in  the  value  of  the  standard 


46  Money  and  Banking 

commodity.  The  only  way  in  which  justice  in  money  mat- 
ters between  man  and  man,  section  and  section,  and  nation 
and  nation  can  be  attained,  therefore,  is  by  means  of  a 
standard  which  is  absolutely  stable. 

7.  Difficulty  of  securing  a  stable  standard  of  value. — 
However  desirable  a  stable  standard  of  value  may  be,  its 
attainment  is  very  difficult.  Not  only  does  no  commodity 
exist  the  value  of  which  is  absolutely  stable,  but  other 
necessary  qualifications  limit  the  choice.  We  may  not 
select  a  commodity  for  a  standard  simply  because  its  value 
is  stable  in  a  high  degree.  It  must  possess  the  other  quali- 
fications mentioned  as  well.  Fortunately,  however,  these 
other  qualifications  contribute  toward  stability  of  value. 
Other  things  being  equal,  a  commodity  which  is  an  object 
of  universal  desire,  and  consequently  widely  and  generally 
used,  is  less  liable  to  fluctuations  in  value  than  one  which 
satisfies  the  wants  of  only  a  few  people.  The  use  of  a  com- 
modity as  a  medium  of  exchange  also  is  liable  to  steady  its 
value,  since  it  is  possible  to  substitute  other  things  for  it  if 
its  value  tends  upward,  and  to  substitute  it  for  other  things 
if  its  value  tends  downward.  The  quantity  of  the  com- 
modity thus  used  acts  as  a  sort  of  reserve  fund  which  is 
used  from  time  to  time  to  steady  the  market.  It  seems 
probable,  therefore,  that  the  commodity  which  has  survived 
the  various  tests  of  actual  experience,  and  is  now  the  stand- 
ard of  value  of  the  commercial  world,  is  as  stable  in  value 
as  any  single  commodity  which  could  be  selected.  That  it 
comes  far  short  of  being  an  ideal  standard,  however,  will 
be  made  evident  in  succeeding  chapters. 

8.  The  interpretation  of  prices. — The  facts  which  have 
been  presented  in  the  present  chapter  should  help  us  to 
appreciate  the  difficulty  involved  in  the  interpretation  of 
present  prices  and  of  price  statistics.  The  market  price  of 
any  commodity  is  certain  to  be  the  result  of  at  least  two 


The  Standard  of  Value  and  Prices  47 

sets  of  circumstances,  namely,  those  which  determine  the 
demand  and  supply  of  the  commodity,  and  those  which 
determine  the  demand  and  supply  of  gold.  In  a  country 
which  possesses  a  secondary  standard  a  third  set  of  cir- 
cumstances enters  in,  namely,  those  which  determine  the 
depreciation  of  the  paper  currency.  Suppose,  for  example, 
that  we  are  asked  to  interpret  a  change  which  took  place  in 
the  market  price  of  wheat  in  the  United  States  between  the 
years  1863  and  1865,  the  price  in  the  former  year,  for  ex- 
ample, being  quoted  at  $1.10  per  bushel  and  in  the  latter 
year  at  $2.50  per  bushel.  If  we  desire  to  know  what  caused 
the  great  rise  in  the  price  of  this  commodity,  we  are  obliged 
to  investigate,  in  the  first  place,  the  demand  and  supply 
of  wheat  during  the  period,  in  the  second  place,  the  demand 
and  supply  of  gold,  and  in  the  third  place,  the  depreciation 
of  the  government  notes  which  constituted  the  currency 
of  the  period.  The  changes  of  price  may  have  been  due 
entirely  to  any  one  of  these  sets  of  causes,  but  it  is  more 
probable  that  it  was  due  to  the  operation  of  all  the  causes 
combined.  An  investigation  of  this  kind  is  necessarily  very 
difficult.  It  is  not  easy  to  determine  at  any  particular  time 
precisely  what  is  the  demand  or  the  supply  of  a  commodity 
such  as  wheat.  It  is  still  more  difficult  to  determine  and 
accurately  to  measure  at  any  particular  time  the  demand 
and  supply  of  gold.  The  depreciation  of  the  notes  is  also 
difficult  to  determine.  At  the  best,  in  such  a  case,  it  is 
usually  possible  only  to  establish  a  certain  probability  in 
favor  of  one  explanation  or  another,  but  it  is  rarely  pos- 
sible to  obtain  absolute  certainty. 

The  interpretation  of  certain  price  statistics  present  even 
greater  difficulties.  The  statistical  tables  which  are  usually 
found  in  public  documents,  and  upon  which  interpretations 
of  price  changes  are  based,  contain  averages  of  the  prices 
of  the  commodities  in  question  over  a  certain  period  of 


4-8  Money  and  Banking 

time  and  on  a  particular  market.  For  example,  the  London 
Economist  publishes  annually  a  statement  of  the  average 
prices  on  the  London  market  of  twenty-two  commodities, 
and  compares  the  average  each  year  with  that  of  a  number 
of  preceding  years.  At  the  same  time  it  presents  also  an 
average  of  the  prices  of  the  twenty-two  commodities,  and 
much  use  has  been  made  of  these  statistics  in  the  discussion 
of  monetary  questions.  It  is  evident  from  the  facts  pre- 
sented in  this  chapter  that  the  interpretation  of  the  meaning 
of  the  average  price  of  a  commodity  for  a  certain  period  of 
time  is  even  more  difficult  than  that  of  a  specific  quotation 
for  a  particular  moment.  Besides  the  various  considera- 
tions mentioned  in  the  preceeding  paragraph,  we  have  now 
to  struggle  with  the  confusion  of  averaging  a  number  of 
quotations.  In  the  average  one  cause  may  offset  another, 
and  the  meaning  of  the  result  can  only  be  obtained  by  un- 
ravelling all  of  these  changes.  Suppose,  for  example,  that 
we  average  the  daily  price  quotations  of  wheat  for  a  par- 
ticular year.  One  day  the  price  is  high  as  compared  with 
the  preceding,  another  day  it  is  low.  The  difference  is 
now  great,  now  small.  These  specific  fluctuations,  as  we 
have  seen,  are  due  to  various  causes,  now  affecting  the  de- 
mand and  supply  of  wheat,  now  the  demand  and  supply  of 
gold.  It  is  difficult,  as  we  have  seen,  to  measure  and  un- 
ravel these  various  causes  in  the  case  of  a  specific  quota- 
tion. How  much  more  difficult  is  it  to  solve  the  problem 
when  we  have  combined  more  than  three  hundred  of  these 
quotations  in  a  single  average!  If  it  is  excessively  diffi- 
cult to  interpret  the  average  price  of  the  individual  com- 
modity, how  nearly  impossible  it  must  be  correctly  to  in- 
terpret an  average  of  the  prices  of  a  number  of  commodities. 
The  purpose  of  statistics  of  average  prices  is  usually  to 
indicate  changes  in  the  purchasing  power  of  the  unit  of 
value.    The  average  of  the  daily  quotations  of  wheat  for  a 


The  Standard  of  Value  and  Prices  49 

year  gives  us  an  idea  of  how  much  wheat  on  the  average 
during  the  year  in  question  a  dollar  would  buy,  and  when 
we  combine  the  prices  of  twenty-two  commodities  for  a 
year  we  have  a  result  which  indicates  to  us  the  average 
amount  of  those  twenty-two  commodities  which  a  dollar 
would  command  during  the  year.  A  knowledge  of  the  pur- 
chasing power  of  the  unit  is  useful  for  many  purposes,  but 
it  renders  little,  if  any,  assistance  in  the  determination  of 
changes  in  the  actual  value  of  commodities  or  in  the  actual 
value  of  gold.  If  we  wish  to  determine  whether  the  ratio 
between  the  demand  and  supply  of  gold  or  of  any  other 
commodity  has  changed  during  a  series  of  years,  only  a 
minute  and  careful  investigation  into  the  various  circum- 
stances which  have  entered  into  the  determination  of  said 
demand  and  supply  will  suffice. 

REFERENCES 

The  nature  and  history  of  standards  of  value  are  treated  in  Laugh- 
lin,  ch.  iii ;  Jevons,  ch.  iv ;  Taylor,  chs.  v  and  vii ;  Knies,  ch.  iv ;  sec- 
tion V  of  Menger,  article  "Geld"  in  the  Handworterbuch  der  Staats- 
wissenshaften  and  in  his  Grunds'dtse  der  Volkswirthshaftslehre,  ch. 
viii.  On  the  importance  of  stability  of  value  in  the  standard  commodity 
see  Walker,  Money,  Trade,  and  Industry,  ch.  iii,  and  Money,  ch.  i ; 
Nicholson,  pt.  I,  ch.  ii,  §§  4,  5,  and  6;  and  Ross,  The  Standard  of  De- 
ferred Payments,  Annals  for  November,  1892.  Price  statistics  and  their 
interpretation  are  treated  in  Laughlin,  ch.  vi ;  Nicholson,  pt.  II,  ch.  vii ; 
Schoenhof,  A  History  of  Money  and  Prices,  ch.  i ;  Walsh,  The  Meas- 
urement of  General  Exchange -Value,  especially  chs.  v,  vi,  and  xiv; 
Falkner,  introduction  to  the  Aldrich  Report  on  Retail  Prices  and 
Wages  and  his  The  Theory  and  Practice  of  Price  Statistics  in  the 
Publications  of  the  American  Statistical  Association,  v.  Ill,  pp.  119-140. 


CHAPTER  IV 
THE  VALUE  OF  THE  STANDARD 

The  standard  commodity  is  no  exception  to  the  general 
laws  of  value.  Marginal  utility,  costs  of  production  and  de- 
mand and  supply  operate  in  this  case  in  precisely  the  same 
manner  as  in  others.  For  a  discussion  of  these  laws  the 
student  is  referred  to  general  treatises  on  political  economy. 
In  this  chapter  we  shall  treat  only  the  peculiar  influences 
which  lie  back  of  them  in  the  case  of  this  particular  com- 
modity. 

I.  Demand  for  the  primary  standard. — It  is  necessary  to 
treat  separately  primary  and  secondary  standards.  The 
reason  for  this,  if  not  obvious  at  this  point,  will  soon  ap- 
pear. From  the  standpoint  of  demand  the  peculiarity  of  the 
standard  commodity  consists  in  the  fact  that  a  very  large, 
usually  the  largest,  part  of  it  comes  from  its  use  as  a  stand- 
ard of  value  and  a  medium  of  exchange.  It  is  probable  that 
between  70  and  80  per  cent,  of  the  present  demand  for  gold 
comes  from  these  sources,  and  from  20  to  30  per  cent,  from 
its  use  for  purposes  of  ordinary  consumption,  such  as  jew- 
elry, plate,  ornamentation,  dentistry,  etc.  These  proportions 
may  and  do  constantly  change.  The  point  to  be  firmly 
grasped  at  this  stage  in  the  discussion  is  the  fact  that  in  the 
case  of  the  standard  commodity  there  are  always  two  main 
sources  of  demand,  namely,  its  service  for  ordinary  con- 
sumption purposes  and  its  service  as  a  standard  of  value 
and  a  medium  of  exchange.  Neither  of  these  sources  should 
at  any  time  be  neglected,  since  neither  of  them  is  ever 
suspended.    To  the  extent  of  its  magnitude  one  is  just  as 

so 


The  Value  of  the  Standard  51 

potent  as  the  other,  and  at  a  given  time  the  total  demand 
which  operates  together  with  the  total  supply  in  the  deter- 
mination of  its  value  is  the  sum  of  the  separate  demands 
which  come  from  its  various  commodity  and  monetary 
uses. 

There  is  nothing  in  the  ordinary  consumption  uses  of 
gold  or  of  any  other  standard  commodity  that  calls  for 
special  treatment  in  this  chapter,  but  the  elements  of  demand 
which  come  from  its  monetary  uses  require  further  con- 
sideration. As  a  standard  of  value  a  commodity  performs 
its  chief  function  by  lying  in  the  vaults  of  banks  and  certain 
government  treasuries,  like  those  of  the  United  States,  as 
security  for  the  redeemability  of  the  various  forms  of  credit 
currency  that  constitute  the  bulk  of  the  medium  of  ex- 
change. How  large  a  sum  is  needed  for  this  purpose  it  is 
impossible  to  say.  It  depends  primarily  on  the  state  of 
confidence.  If  men  generally  trust  each  other  and  freely 
accept  each  other's  promises  to  pay,  the  amount  required  is 
very  small.  Indeed,  it  is  conceivable  that  it  might  be  re- 
duced almost,  if  not  quite,  to  zero.  If  confidence  between 
man  and  man  becomes  impaired  in  any  degree,  the  amount 
required  is  larger  and  it  may  become  enormous.  At  any 
given  time  it  is  determined  chiefly  by  the  judgment  of 
bankers.  Sometimes,  as  in  the  case  of  most  of  the  banking 
institutions  of  the  United  States,  the  laws  fix  a  minimum,  in 
the  form  of  a  percentage  of  their  deposits,  below  which 
bankers  are  not  permitted  to  allow  their  reserves  to  fall, 
but  only  a  part  of  these  reserves  can  be  regarded  as  an 
insurance  fund  of  the  kind  we  are  describing.  A  part  of 
them  is  also  required  to  meet  the  ordinary  demand  of  the 
community  for  a  particular  form  of  currency.  This  fact 
brings  us  to  the  consideration  of  the  second  source  of  the 
monetary  demand  for  the  standard  commodity,  namely,  the 
demand  for  it  as  a  medium  of  exchange. 


52  Money  and  Banking 

In  a  preceding  chapter  it  was  shown  that  coins  of  dif- 
ferent denominations  are  essential  elements  of  a  good 
medium  of  exchange.  If  the  standard  commodity  is  used  in 
the  manufacture  of  some  of  these  coins,  as  it  always  is,  a 
demand  for  it  results,  measured  by  the  amount  of  such 
coins  needed.  The  amount  depends  upon  a  great  variety  of 
circumstances,  many  of  which  are  subject  to  purely  arbitrary 
changes.  Among  the  most  important  of  these  are:  the 
presence  or  absence  of  other  forms  of  currency  of  the  same 
denominations;  the  capacity  of  such  other  forms  of  cur- 
rency to  satisfy  the  needs  of  commerce ;  and  the  aggregate 
value  of  the  commodities  to  be  exchanged  within  a  given 
time  by  means  of  currency  of  these  particular  denomina- 
tions. 

The  manner  in  which  the  substitution  of  other  forms  of 
currency  affects  the  demand  for  the  standard  commodity  is 
well  illustrated  by  the  practices  of  the  various  countries  at 
the  present  time.  For  example,  in  England  there  is  no 
form  of  ordinary  hand-to-hand  credit  currency  in  circula- 
tion below  the  denomination  of  five  pounds  or  twenty-five 
dollars.  Consequently  the  entire  demand  for  money  of 
denominations  between  the  silver  crown,  worth  about  one 
dollar  and  twenty  cents,  and  the  five  pound  bank-note  must 
be  supplied  by  coins  made  of  the  standard  commodity,  gold. 
In  Scotland  a  large  part  of  this  demand  is  supplied  by 
means  of  one  pound  bank-notes,  and  in  the  United  States 
we  use  for  this  purpose  not  only  bank-notes  of  denomina- 
tions five  dollars  and  above,  but  various  forms  of  govern- 
ment notes  of  denominations  from  one  dollar  up.  If  we 
should  cease  to  use  credit  currency  of  these  denominations, 
a  demand  for  gold  coins  to  take  its  place  would  appear  and 
the  total  demand  for  gold  would  be  to  that  extent  increased. 
If  the  Bank  of  England  should  be  permited  to  issue  one 
pound  notes  against  securities,  and  should  actually  do  so. 


The  Value  of  the  Standard  53 

there  would  be  a  decrease  in  the  use  of  gold  coins  in  Eng- 
land and  a  corresponding  decline  in  the  demand  for  gold 
in  that  country. 

It  is  obvious  that  no  form  of  credit  currency  can  take  the 
place  of  coins  made  of  the  standard  metal  in  their  use  as  a 
medium  of  exchange  unless  it  is  capable  of  performing  that 
service  quite  as  well  as  or  better  than  such  coins.  In  order 
to  do  this,  the  public  must  be  assured  of  the  ability  of  the 
issuer  to  redeem  such  currency  on  demand  in  the  standard 
commodity,  it  must  be  equally  as  convenient  or  more  con- 
venient than  standard  coins,  and  the  public  must  be  able  to 
obtain  it  by  means  no  more  onerous  than  those  required  for 
obtaining  such  coins.  Not  all  forms  of  credit  currency  are 
capable  of  meeting  these  requirements,  but  many  are,  and 
the  ingenuity  of  man  in  inventing  such  forms  has  by  no 
means  been  exhausted. 

The  composition  of  the  currency  and  the  habits  of  the 
people  in  the  use  of  its  various  elements  being  for  the  time 
fixed,  the  magnitude  of  the  demand  for  the  standard  metal 
as  a  medium  of  exchange  is  determined  by  the  total  value 
of  all  the  commodities  simultaneously  to  be  exchanged  by 
means  of  standard  coins.  Suppose,  for  example,  a  thousand 
commodities  worth  on  the  average  a  dollar  a  piece  are 
going  to  be  simultaneously  exchanged  by  means  of  standard 
coins.  It  is  obvious  that  coins  to  the  amount  of  one  thou- 
sand dollars  will  be  required  for  that  purpose.  Several 
points  involved  in  this  proposition  should  be  carefully  noted. 
First,  the  word  simultaneously  employed  in  this  connection 
is  important.  If  groups  of  commodities  are  exchanged 
one  after  the  other  instead  of  simultaneously,  the  same 
coins  may  be  used  again  and  again.  This  fact  is  frequently 
emphasized  by  the  statement  that  the  rapidity  of  the  circula- 
tion of  coins  is  an  element  in  the  determination  of  the 
demand  for  them.    If  in  a  given  time,  say  a  day,  a  thousand 


54  Money  and  Banking 

dollars'  worth  of  coins  are  used  four  times,  they  would  per- 
form the  same  amount  of  work  as  four  thousand  dollars' 
worth  used  once  only  during  the  day.  If,  therefore,  we 
consider  a  unit  of  time,  such  as  a  day  or  a  week,  the  demand 
for  standard  coins  will  depend  upon  the  rapidity  of  their 
circulation  as  well  as  upon  the  total  value  of  the  goods  ex- 
changed. The  use  of  the  word  simultaneously  in  our  propo- 
sition concentrates  attention  on  the  goods  to  be  exchanged 
at  the  same  time,  and  it  is  obvious  that  the  same  coins  cannot 
do  two  pieces  of  work  at  once. 

Another  point  to  be  carefully  noted  is  the  fact  that  the 
prices  of  goods  are  a  factor  in  the  determination  of  their 
total  value,  and  consequently  of  the  monetary  demand  for 
the  standard  commodity,  equally  important  with  their  quan- 
tity. If  the  average  price  of  each  of  the  thousand  commodi- 
ties had  been  two  dollars  instead  of  one,  two  thousand  in- 
stead of  one  thousand  dollars'  worth  of  coins  would  have 
been  required  to  accomplish  their  exchange.  The  determi- 
nation of  prices  is,  therefore,  antecedent  to  the  determina- 
tion of  the  monetary  demand  for  the  standard  commodity. 
This  statement  reveals  a  relation  between  this  source  of 
demand  and  prices  which  requires  further  elaboration,  since 
it  is  frequently  misunderstood. 

In  a  previous  chapter  we  have  shown  that  prices  are  the 
numerical  expression  of  the  ratio  between  the  value  of  the 
conventional  unit  of  any  good  and  of  that  amount  of  the 
standard  commodity  fixed  by  statute  as  the  unit  of  values. 
We  have  now  shown  that  one  element  in  the  determination 
of  the  demand  for  the  standard  commodity,  and  hence  in 
the  determination  of  its  value,  and  hence  in  the  determina- 
tion of  prices,  is  the  amount  needed  for  monetary  purposes, 
and  that  into  that  amount  prices  also  enter  as  a  determining 
factor.  This  looks  like  reasoning  in  a  circle,  but  the  ar- 
rangement of  these  various  influences  in  their  proper  order 


The  Value  of  the  Standard  55 

as  regards  time  of  operation  will  show  that  in  reality  it  is 
not.  At  a  given  date,  for  example,  .the  values  of  each  class 
of  goods  and  of  the  standard  commodity  have  been 
determined  by  the  various  elements  entering  into  the 
supply  and  the  demand  of  each  one,  including  in  the 
case  of  the  standard  commodity  the  demand  for  it 
for  monetary  purposes.  Prices  are  the  numerical  expres- 
sion of  the  values  thus  determined.  In  the  next  period 
of  time,  that  is,  in  the  one  immediately  succeeding  that 
just  considered,  these  prices  will  enter  into  the  determina- 
tion of  the  monetary  demand  for  the  standard  commodity, 
either  increasing  it  or  decreasing  it  or  maintaining  it  as  be- 
fore, and  in  this  way  together  with  all  the  other  influences 
affecting  its  demand,  help  to  determine  its  value,  which, 
when  thus  determined,  will  play  its  usual  role  in  prices. 
The  starting  point  in  this  process  of  action  and  reaction  is 
the  value  of  the  standard  commodity  for  ordinary  pur- 
poses of  consumption,  since,  as  we  have  already  shown,  a 
valuation  based  upon  these  uses  must  necessarily  have  pre- 
ceded its  use  either  as  a  standard  of  value  or  a  medium  of 
exchange.  In  the  process  of  time  this  valuation  has  been 
greatly  changed  by  its  monetary  uses  and  it  is  constantly 
being  so  changed,  but  this  fact  does  not  alter  the  fundamen- 
tal character  of  its  demand  for  ordinary  purposes  of  con- 
sumption or  justify  the  neglect  of  this  demand  in  the  con- 
sideration of  the  processes  of  valuation. 

In  this  connection  it  is  well  to  remember  that  the  mone- 
tary demand  for  the  standard  commodity,  while  very  real 
and  very  potent,  is  peculiar  in  that  it  may  be  arbitrarily 
modified  by  the  substitution  of  credit  currency  for  it  in  the 
medium  of  exchange  and  by  changes  in  the  regulations  per- 
taining to  bank  reserves.  The  former  process  has  been 
illustrated  in  a  preceding  paragraph ;  of  the  latter  our  own 
history  furnishes  many  examples.    Between  the  years  1863 


56  Money  and  Banking 

and  1879  government  notes  not  redeemable  on  demand  in 
coin  were  the  chief  element  of  the  bank  reserves  of  this 
country.  After  the  resumption  of  specie  payments  in  1879 
coin  was  again  used,  but  even  up  to  the  present  time  green- 
backs and  gold  and  silver  certificates  are  available  for  that 
purpose.  If  Congress  should  pass  a  law,  as  it  might,  for- 
bidding the  use  of  anything  except  gold  coin  for  this  pur- 
pose, the  demand  for  gold  would  be  largely  increased.  If 
it  should  supply  an  additional  amount  of  greenbacks  and 
permit  them  to  be  held  as  reserves,  a  considerable  diminu- 
tion in  the  demand  for  gold  would  result.  A  change  in  the 
limitation  at  present  established  by  law  on  the  amount  of 
reserves  banks  must  hold  or  in  the  places  at  which  they  are 
permitted  to  keep  them  might  very  materially  affect  the 
demand  for  this  metal. 

The  use  of  gold  as  a  store  of  value  is  often  mentioned  as 
one  of  the  sources  of  its  demand.  By  this  is  meant  its  em- 
ployment in  hoards  for  the  purpose  of  preserving  and  safe- 
guarding property.  This  is  certainly  one  of  its  uses,  but 
one  continually  diminishing  in  importance  and  in  normal 
times  of  no  great  influence.  Other  means  of  preserving 
and  safe-guarding  property,  such  as  its  use  for  production 
purposes  through  the  various  processes  of  loan  and  invest- 
ment, are  far  superior  and  are  now-a-days  generally  em- 
ployed. In  times  of  uncertainty  and  distrust,  however,  this 
use  of  gold  may  become  important  and  a  disturbing  ele- 
ment of  considerable  significance. 

2.  Supply  of  the  standard  commodity. — The  supply  of 
every  commodity,  regardless  of  its  uses,  is  subject  to  con- 
ditions some  of  which  are  peculiar  to  itself,  and  to  this  rule 
gold  and  silver,  the  sole  standard  commodities  in  use  at 
the  present  time  among  civilized  peoples,  are  no  exceptions. 
From  the  point  of  view  of  durability  these  metals  stand  at 
the  head  of  the  mineral  kingdom.    On  this  account,  in  pro- 


The  Value  of  the  Standard  57 

portion  to  the  amount  annually  produced,  the  quantity  in 
existence  tends  to  accumulate  more  rapidly  than  that  of 
other  commodities,  the  loss  from  wear  and  tear  and  actual 
destruction  in  the  process  of  consumption  being  relatively 
small.  In  consequence  of  this  fact  the  amount  of  these 
metals  in  the  world  at  the  present  time  is  very  great,  the 
process  of  accumulation  having  been  going  on  for  many 
centuries.  The  form,  too,  in  which  a  very  large  proportion 
of  it  exists, — plate,  jewelry,  bars,  coins,  etc., — is  such  that 
its  transfer  from  one  use  to  another  can  be  very  easily 
made. 

The  supply  of  either  of  these  metals,  which  in  connec- 
tion with  the  demand  determines  their  value,  is  the  amount 
offered  for  sale  at  a  given  time,  and  not  the  entire  mass  ac- 
cumulated through  the  centuries;  but  the  existence  of  this 
mass  constitutes  a  potential  supply  which  exerts  a  steadying 
influence  on  its  value,  since  any  change  tends  to  cause  a 
transfer  to  or  from  this  mass  to  the  market.  If  the  market 
value  of  the  metal  tends  to  rise,  coin,  plate,  jewelry,  etc., 
may  be  melted  and  sold  as  bullion,  thus  increasing  the  sup- 
ply, and  in  the  opposite  case,  bullion  may  be  transformed 
into  coin,  plate,  jewelry,  etc.  and  the  market  supply  dimin- 
ished. These  changes  in  supply  to  a  degree  counteract  the 
tendency  of  the  market  price  to  change  and  thus  contribute 
toward  stability  of  value.  The  portion  of  this  mass,  which 
exists  in  the  form  of  coin,  may  be  very  easily  moved  to  the 
bullion  market,  little  or  no  change  in  form  or  fineness  being 
required,  and  bullion  may  be  transformed  into  coin  at  the 
mints  of  some  countries  without  any  cost  to  the  owner  and 
with  very  little  loss  of  time. 

Another  consequence  of  the  durability  of  the  precious 
metals  and  of  the  consequent  steady  increase  in  the  mass 
accumulated  has  doubtless  been  a  gradual  fall  in  their  value, 
at  least  since  the  discovery  of  the  mines  of  South  America 


58  Money  and  Banking 

in  the  sixteenth  century.  There  can  be  Httle  doubt  that 
their  supply  as  compared  to  the  demand  for  them  at  the 
present  time  is  greater  than  at  any  other  period  in  the 
world's  history.  The  same  statement  could  probably  be 
made  concerning  most  other  commodities.  This  is  but 
another  way  of  saying  that  the  wants  of  people  are  better 
supplied  now-a-days  than  ever  before.  It  is,  however  also 
probable  that  the  degree  of  decline  in  the  value  of  the  pre- 
cious metals  has  been  greater  than  in  most  other  commodi- 
ties. The  evidence  of  this  is  the  tendency  of  prices  to  rise. 
A  comparison  of  the  recorded  prices  through  long  periods 
of  time  of  a  commodity  like  wheat,  reveals  this  tendency, 
as  does  also  a  comparison  of  the  averages  of  the  prices  of 
groups  of  commodities. 

3.  The  value  of  secondary  standards. — Secondary  stand- 
ards have  already  been  described  as  discounted  or  depre- 
ciated notes  which,  in  accordance  with  Gresham's  law,  have 
taken  the  place  of  coin  in  the  medium  of  exchange,  not  only 
as  hand-to-hand  money,  but  as  a  basis  of  other  elements  of 
the  currency.  We  shall  now  consider  the  chief  causes  and 
consequences  of  the  difference  in  value  between  these  notes 
and  the  primary  standard  in  existence  at  the  time. 

Being  actual  or  implied  promises  to  pay,  these  notes  are 
credit  instruments  and  their  value  is  subject  to  the  laws 
governing  such  instruments.  The  most  fundamental  of 
these  is  the  result  of  the  loan  feature  which  characterizes 
them.  When  a  government  issues  such  notes  it  is  really 
forcing  a  loan  from  the  people,  a  loan  of  the  services  and 
commodities  for  which  it  gives  the  notes  in  payment. 
When,  in  the  ordinary  processes  of  commerce,  a  person  re- 
ceives these  notes  in  payment  for  goods  or  services,  he  is 
in  reality  making  a  loan,  since  what  he  has  obtained  in 
return  for  his  property  is  a  promise  to  pay  the  standard 
commodity,  which  promise  is  not  redeemable  on  demand 


The  Value  of  the  Standard  59 

but  at  some  date  in  the  future.  For  loans  interest  must  be 
paid,  and  since  these  notes  are  non-interest-bearing  their 
value  necessarily  depreciates,  the  amount  of  depreciation 
depending  upon  the  rate  of  interest  and  the  length  of  the 
period  during  which  it  is  calculated.  But  how  is  this  rate 
of  interest  and  the  length  of  this  period  to  be  determined? 

On  the  face  of  the  notes  the  date  of  their  redemption  is 
usually  not  indicated,  and  in  most  cases  a  considerable 
period  of  time  elapses  before  a  date  is  fixed  by  the  public 
authorities.  During  all  this  time  people  can  only  speculate 
regarding  the  time  at  which  the  notes  will  be  redeemed  and 
their  speculations  will  vary  according  to  the  course  of 
events  likely  to  affect  the  ability  and  willingness  of  the 
responsible  party  to  pay  and  according  to  the  various  de- 
grees of  their  optimism  or  pessimism.  During  our  Civil 
War,  for  example,  the  United  States  notes,  which  became 
a  secondary  standard  of  value  soon  after  their  issue  in  1862, 
fluctuated  with  the  varying  fortunes  of  the  armies  in  the 
field  and  the  financial  condition  of  the  government.  After 
the  war  the  element  of  risk  diminished  as  the  financial  con- 
dition of  the  government  improved,  and  after  the  passage 
of  the  resumption  act  in  1875  the  date  for  the  redemption  of 
the  notes  became  definite.  It  is  evident,  therefore,  that  both 
the  element  of  risk,  which  always  enters  into  the  determina- 
tion of  the  rate  of  interest,  and  the  length  of  the  period 
during  which  the  interest  is  to  be  reckoned  are  speculatively 
determined  in  the  case  of  inconvertible  notes,  and  on  this 
account  their  depreciation  is  liable  to  wide  and  frequent 
variations. 

The  monetary  services  performed  by  these  notes  tend  to 
obscure  the  influence  of  the  loan  feature  and  introduce  new 
factors  into  the  determination  of  their  value.  The  ability 
of  a  person  to  pay  his  debts  with  them  and  to  use  them  in 
the  purchase  of  other  commodities  renders  possible  a  con- 


6o  Money  and  Banking 

tinual  shifting  from  one  person  to  another  of  the  risks  and 
possibilities  of  loss  involved  in  their  possession,  but  the  fact 
that,  so  long  as  industry  and  commerce  continue,  every 
person  must  receive  them  in  payment  for  the  goods  and 
services  he  sells  offsets  any  advantage  which  might  other- 
v^^ise  be  derived  from  this  possibility.  Ultimately  each 
person  must  assume  a  share  of  the  risks  and  losses  involved 
in  the  use  of  such  notes,  and  their  depreciation  to  the  full 
extent  warranted  by  such  risks  and  losses  would  be  inevita- 
ble, were  it  not  for  the  fact  that  their  serviceability  for 
monetary  purposes  creates  a  new  demand  for  them  which 
affects  their  value.  The  possible  extent  of  this  demand  is 
the  amount  of  coin  in  use  for  monetary  purposes  plus  the 
amount  the  increase  in  prices,  due  to  the  depreciation  of 
the  notes,  would  occasion.  However,  it  would  rarely,  if 
ever,  be  so  great  as  this.  Coin  does  not  cease  to  be  useful 
for  many  monetary  purposes  when  such  notes  come  into 
competition  with  it.  At  a  premium  measured  by  the  de- 
preciation of  the  notes  they  are  as  useful  as  ever  and  may 
continue  to  be  used  whenever  such  premium  can  be  real- 
ized. The  notes  will  take  their  place  only  in  those  uses  in 
which  this  premium  cannot  be  realized,  namely,  as  hand-to- 
hand  money  within  the  territory  in  which  they  are  legal- 
tender.  For  that  element  of  bank  reserves  which  consti- 
tutes an  insurance  fund  against  future  contingencies,  such 
as  the  shattering  or  destruction  of  confidence  between  man 
and  man,  for  international  payments,  and  as  a  store  of 
value  the  use  of  coin  will  continue  to  be  as  profitable  as 
ever. 

The  tendency  of  thh  monetary  demand  is  to  diminish 
the  depreciation  to  which  the  notes  are  normally  subject, 
but  it  is  impossible  to  determine  the  magnitude  of  its  in- 
fluence in  this  direction.  As  we  have  seen,  the  most  potent 
causes  of  depreciation  are  subjective  and  hence  impossible 


The  Value  of  the  Standard  6i 

of  exact  measurement  and  there  is  no  way  of  determining 
the  magnitude  of  the  monetary  demand  for  them  at  a  given 
time.  The  actual  depreciation  of  the  notes,  or  the  premium 
on  the  standard  commodity,  which  is  the  same  thing,  is  a 
known  quantity,  obtainable  from  market  quotations,  but  the 
various  influences  which  have  determined  it  cannot  be 
separated  and  measured.  The  market  records  which  are 
available  for  study  indicate  that  the  monetary  demand  has 
rarely,  if  ever,  been  sufficient  to  prevent  depreciation.  In- 
deed, whenever  and  wherever  such  notes  have  been  ex- 
tensively employed  their  depreciation  has  been  great  and 
subject  to  frequent  and  wide  variations. 

4.  The  quantity  theory. — The  value  of  the  standard  is 
ordinarily  explained  by  a  theory  which  assigns  to  the 
money  supply  so  peculiar  an  influence  on  its  value  that 
the  name  quantity  theory  is  commonly  given  it.  In  many 
important  particulars  this  theory  is  out  of  harmony  with 
the  explanation  given  in  the  preceding  paragraphs.  On 
this  account  it  demands  attention  at  this  point.  Various 
methods  of  stating  and  defending  this  theory  have  been 
employed  which  the  student  is  advised  to  examine  with  the 
aid  of  the  references  given  at  the  close  of  this  chapter. 
Only  its  essential  features  will  be  indicated  here.  A  recent 
writer  has  described  them  in  substantially  the  following 
manner : 

At  a  given  time  there  is  needed  in  a  country  a  certain 
amount  of  money  value  or  utility,  that  is,  "utility  in  a  form 
possessing  universal  and  immediate  acceptability."  This 
amount  "depends  upon  the  volume  of  transactions,  upon 
the  population  of  the  country,  the  quantities  of  goods  they 
produce  and  exchange,  their  customs  with  regard  to  the 
use  of  credit  as  a  medium  of  exchange,  their  business 
organization,  their  methods  of  production  and  exchange, 


62  Money  and  Banking 

and  their  habits  with  regard  to  the  keeping  of  money  on 
hand."  * 

This  need  or  demand  for  money  value  creates  the  supply 
of  money  value,  since  all  the  goods  the  sale  of  which  pro- 
duces this  demand  are  offered  in  exchange  for  the  money 
of  the  country  regardless  of  its  amount,  and.  being  use- 
ful for  no  other  purpose,  all  the  money  of  the  country  is 
oft'ered  for  them.  **  These  two  aggregates  being  exchanged 
each  for  the  other,  their  values  are  equal,  and  the  value  of 
a  unit  of  the  money  supply  equals  the  total  value  of  the 
goods  offered  for  sale  divided  by  the  number  of  units  and 
varies  inversely  with  this  number.  For  example,  if  the 
amount  of  money  value  needed  is  looo  and  the  number  of 
money  units  500.  the  value  of  a  single  unit  is  2 ;  if  the  num- 
ber of  units  be  increased  to  1000,  the  value  of  each  falls  to  i ; 
and  if  the  number  be  decreased  to  100,  the  value  of  each 
rises  to  10. 

In  this  description  the  word  money  means  standard 
coins  and  the  substance  of  the  entire  statement  may  be  ex- 
pressed in  three  propositions : 

(i)  At  any  given  moment  a  certain  quantity  of  com- 
modities is  offered  in  exchange  for  standard  coins,  the 
quantity  being  determined  by  the  various  circumstances 
mentioned  above; 

(2)  The  total  value  of  the  standard  coins  regardless  of 
their  number  or  of  their  value  as  bullion  will  equal  the 
total  value  of  the  goods  offered  in  exchange  for  them ; 

(3)  The  total  value  of  the  unit  will,  therefore,  equal  the 
total  value  of  such  goods  divided  by  the  number  of  units 
in  the  supply  and  will  vary  inversely  with  that  number. 

In  order  to  make  very  clear  the  lack  of  dependence  of  the 
value  of  the  monetary  unit  on  that  of  the  bullion  con- 

*  Johnson's  Money  and  Currency,  p.  19. 
**  Ibid,  pp.  27,  28. 


The  Value  of  the  Standard  63 

tained  in  it,  another  writer  *  illustrates  the  theory  by  as- 
suming the  money  of  a  country  to  be  composed  of  dodo 
bones,  the  nearest  approximation  to  an  absolutely  worthless 
thing  he  could  think  of.  Under  this  assumption,  if  the 
number  of  dodo  bones  were  1000,  the  value  of  each  would 
be  one  one-thousandth  part  of  that  of  the  goods  offered  in 
exchange;  if  the  number  were  reduced  to  100,  the  value 
of  each  would  rise  to  one  one-hundredth  part  of  that  of  the 
goods,  and  so  on. 

Regarding  the  first  proposition  it  should  be  observed  that 
the  exchange  of  any  good  or  goods  for  standard  coins  im- 
plies the  previous  possession  of  value  by  the  latter.  It 
is  unreasonable  to  suppose  that  any  one  would  trade  a  com- 
modity which  he  valued  for  one  that  had  no  value  what- 
ever. The  dodo  bone  assumption  is,  therefore,  impossible, 
since  such  a  worthless  thing  could  never  come  into  use  as 
standard  money.  This  truth  has  been  obscured  by  the 
monetary  use  of  inconvertible  notes.  These  notes,  how- 
ever, are  always  actual  or  implied  promises  to  pay,  and  the 
amounts  are  always  stated  in  terms  of  the  prevailing  stand- 
ard. They  constitute  secondary  standards,  and  the  satis- 
factory explanation  of  their  value  is  impossible  without 
reference  to  the  value  of  the  primary  standard  which  has 
been  previously  and  independently  established. 

It  is  obvious  that  exchanges  between  goods  in  general 
and  the  standard  commodity  will  take  place  at  the  beginning 
on  the  basis  of  the  value  already  established  by  their 
respective  demands  and  supplies  for  ordinary  consumption 
purposes,  no  other  basis  being  possible,  and  that  the  extent 
of  the  monetary  demand  for  this  commodity  can  only  reveal 
itself  quantitatively  on  the  basis  of  prices  thus  established. 
For  example,  if  there  are  1000  commodities,  and  the  aver- 
age price  of  each  is  one  dollar,  there  will  be  a  demand  for 

*J.   Shield  Nicholson. 


64  Money  and  Banking 

$1000,  if  the  average  price  of  each  is  two  dollars,  there 
will  be  a  demand  for  $2000.  It  is  obviously  impossible  to 
know  what  the  demand  will  be  before  the  price  of  each 
commodity  is  determined.  That  demand  once  revealed  and 
made  effective  by  the  offering  of  goods  for  the  standard 
commodity  on  this  basis  will  become  an  element  of  the  total 
demand  and  will  affect  its  value,  and  through  that  value 
prices,  and  through  these  the  monetary  demand  again. 
The  proportion  of  the  monetary  demand  to  that  from  other 
sources  makes  no  difference  in  the  valuation  process  or 
in  the  fundamental  character  of  the  value  of  the  standard 
commodity  for  purposes  of  ordinary  consumption.  The 
utility  of  the  standard  commodity  for  these  purposes  is 
the  basis  of  its  utility  for  monetary  purposes.  The  latter 
could  not  exist  without  the  former  and  for  all  time  con- 
tinues to  have  vital  relations  with  it. 

If  the  prices  of  the  commodities  exchanged  are  deter- 
mined by  comparisons  of  their  values  with  that  of  a  stand- 
ard independently  determined  by  its  supply  and  demand,  in 
which  its  use  for  ordinary  purposes  of  consumption  is  a 
fundamental  factor,  then  the  total  value  of  the  monetary 
supply  is  not  independent  of  the  number  of  units  in  circula- 
tion, as  is  stated  in  the  second  of  the  above  propositions,  but 
is  proportional  to  that  number,  being  equal  to  the  product 
of  it  and  the  value  of  the  unit.  Furthermore,  the  number 
of  units  in  use  for  monetary  purposes  is  in  the  first  instance 
a  result  of  the  level  of  prices  established  by  the  above  men- 
tioned comparisons,  and  enters  into  the  determination  of 
the  value  of  the  unit  in  the  succeeding  period  of  time  only 
to  the  extent  that  it  constitutes  an  increase  in  the  demand 
for  the  bullion  of  which  it  is  composed. 

The  statement  that  the  value  of  the  unit  equals  the  total 
value  of  the  goods  exchanged  for  standard  coins  divided  by 
the  number  of  units  they  represent  is  an  identical  proposi- 


The  Value  of  the  Standard  65 

tion  which  has  no  significance,  if  the  second  of  the  above 
propositions  be  not  true,  and  is  objectionable  in  so  far  as 
it  leaves  the  impression  that  the  value  of  the  unit  is  derived 
solely  from  the  demand  for  it  for  monetary  purposes  and  is 
independent  of  the  supply  and  demand  for  bullion. 

The  chief  objections  to  the  quantity  theory  may,  there- 
fore, be  summarized  as  follows : 

1.  It  underestimates  the  importance  of  the  bullion  value 
of  the  standard  commodity  and  incorrectly  explains  the 
relation  of  that  value  to  the  value  of  the  standard  coins. 

2.  Its  statement  of  the  relation  of  the  quantity  of  money 
to  its  value  is  incorrect  and  misleading. 

3.  Its  explanation  of  the  sources  of  the  value  of  the 
monetary  unit  being  incorrect,  it  fails  to  recognize  the 
existence  of  secondary  standards  and  consequently  correctly 
to  explain  the  value  of  inconvertible  notes. 

4.  It  may  be  added  that  on  account  of  these  errors  it 
has  given  support  to  a  widespread  belief  in  the  efficacy  and 
importance  of  changes  in  the  volume  of  the  circulating 
medium  which  is  erroneous  and  dangerous. 

REFERENCES 

This  subject  is  ably  and  exhaustively  treated  in  Laughlin,  chs.  vii, 
viii  and  ix.  For  other  criticisms  of  the  quantity  theory  see  Miss 
Hardy,  "The  Quantity  Theory  of  Money  and  Prices,"  Jour,  of  Pol. 
Econ.,  March,  1895;  Mitchell,  "Quantity  Theory  of  the  Value  of 
Money,"  ibid.,  March,  1896;  Willis,  "Credit  Devices  and  the  Quantity 
Theory,"  ibid.,  June,  1896;  Hazell,  "Quantity  Theory  of  Money  from 
the  Marxist  Standpoint,"  ibid.,  December,  1898;  Scott,  "The  Quantity 
Theory,"  Annals,  March,  1897;  Farrer,  Studies  in  Currency,  ch.  v; 
White,  Money  and  Banking,  bk.  11,  ch.  xvii ;  and  Schoenhof,  The 
History  of  Money  and  Prices. 

For  statements  and  defense  of  the  quantity  theory  see  Johnson, 
Money  and  Currency,  chs.  ii,  iii,  vi,  xiii ;  Kinley,  Money,  ch.  viii ; 
Walker,  Political  Economy,  §§  169-175;  Money,  chs.  iii-viii;  and  "The 
Quantity  Theory,"  Quart.  Jour.  Econ.  v.  ix;  Nicholson,  Money  and 
Monetary  Problems,  chs.  v-vii ;  Mill,  Political  Economy,  bk.  in,  chs. 
viii  and  ix ;  and  Kemmerer,  Money  and  Credit  Instruments  in  their 
relation  to  general  prices. 


CHAPTER  V 
THE  ELEMENTS  OF  THE  MEDIUM  OF  EXCHANGE 

In  Chapter  II  the  currencies  of  modern  times  were  ana- 
lyzed into  their  constituent  elements  and  their  general  char- 
acteristics pointed  out.  We  shall  now  consider  each  element 
separately,  beginning  with  the  metallic. 

I.  The  purpose  and  importance  of  coinage. — Metals  now- 
adays serve  the  purposes  of  money  chiefly  in  the  form  of 
coins.  Originally  doubtless,  and  occasionally  in  historic 
times,  they  were  used  in  a  crude  state,  the  requisite  amount 
being  weighed  out  on  the  occasion  of  each  exchange  or 
passed  from  hand  to  hand  in  quills  or  other  crude  recep- 
tacles capable  of  being  used  as  instruments  of  measure- 
ment. The  great  advantages  of  coins,  however,  led  to  their 
universal  use  in  very  early  times,  and  at  present  their  manu- 
facture constitutes  a  business  of  no  small  magnitude  and  of 
great  social  significance. 

A  coin  may  be  defined  as  a  piece  of  metal  or  combina- 
tion of  metals  bearing  a  stamp  indicative  of  its  weight  and 
fineness,  and  other  devices  designed  to  render  counterfeit- 
ing difificult,  to  prevent  clipping  and  sweating,  and  some- 
times to  serve  educational,  artistic,  or  patriotic  purposes. 
The  explanation  of  their  universal  use  may  be  found  in  the 
fact  that,  in  order  to  transact  business  rapidly  and  accurate- 
ly, it  is  absolutely  necessary  that  the  money  metals  should 
be  put  up  in  accurately  labelled  packages  of  convenient  size 
and  weight,  so  that  any  amount,  large  or  small,  can  be 
transferred  from  one  person  to  another  or  from  one  place 
to  another  without  the  waste  of  time  and  danger  of  error 

66 


The  Elements  of  the  Medium  of  Exchange     67 

which  weighing  the  metals  or  measuring  them  in  any  other 
way  would  involve.  If  gold  and  silver  in  its  pure  state 
had  to  be  weighed  in  every  transaction,  commerce  on  a 
large  scale,  in  which  rapidity  and  accuracy  are  essential  and 
even  slight  losses  in  each  exchange  ruinous,  would  be  im- 
possible. A  properly  made  coin  always  contains  a  fixed 
amount  of  metal  of  an  invariable  degree  of  fineness,  and  is 
so  marked  that  we  may  know  its  exact  weight  and  contents 
at  sight  without  resort  to  the  scales  or  the  melting-pot.  In 
making  exchanges,  therefore,  it  is  only  necessary  to  count 
and  handle  them,  processes  which  may  be  performed  very 
rapidly  if  their  denominations,  sizes,  and  weights  are  con- 
veniently arranged. 

Among  the  prime  considerations  in  the  manufacture  of 
coins  are  honestly  and  accuracy.  Inasmuch  as  they  must 
pass  from  hand  to  hand  throughout  the  length  and  breadth 
of  the  land  and  among  rich  and  poor,  learned  and  ignorant, 
those  who  understand  their  nature  and  those  who  do  not, 
and  must  be  accepted  by  everybody  at  the  value  represented 
by  the  devices  placed  upon  them,  absolute  confidence  in  the 
honesty  and  accuracy  of  their  manufacture  is  essential.  If 
the  stamp  placed  upon  the  coins  were  false,  for  example, 
people  would  soon  discover  the  fact,  and  refuse  to  accept 
them,  or,  if  compelled  by  law,  protect  themselves  by  refus- 
ing to  sell  their  goods  and  services  or  by  raising  their 
prices.  In  any  case  commerce  would  be  seriously  obstructed 
and  perhaps  entirely  destroyed.  Inaccuracy  in  their  manu- 
facture is  almost  equally  harmful.  Two  coins  of  the  same 
denomination  and  made  from  the  same  metal  should  be 
exactly  equivalent  to  each  other  in  weight  and  fineness. 
Otherwise  the  superior  coins  would  soon  be  culled  out  and 
melted  up  and  the  currency  be  constituted  exclusively  of 
the  inferior  ones.  Moreover,  the  process  of  exchanging 
coins  for  each  other  simply  for  the  purposes  of  gain  in- 


68  Money  and  Banking 

terferes  with  their  legitimate  use  and  obstructs  commerce. 
Owing  in  part  at  least  to  its  great  importance,  the  right 
of  coinage  has  been  considered  from  very  early  times  as  the 
prerogative  of  the  sovereign.  Throughout  Europe,  how- 
ever, during  the  Middle  Ages  it  was  frequently  granted  to 
petty  princes  and  free  cities,  and  in  consequence  very  much 
abused.  In  order  to  make  the  money  received  go  very 
much  farther  than  it  otherwise  would  in  the  payment  of 
debts  and  the  purchase  of  commodities,  debasement  was 
frequently  practised ;  that  is,  baser  and  cheaper  metals  were 
substituted  for  a  part  of  the  gold  and  the  silver,  the  old 
weight  and  name  being  retained.  Another  method  em- 
ployed to  accomplish  the  same  end  was  the  reduction  of 
the  weight  and  the  size  of  the  coins.  These  practices  were 
equivalent  to  a  partial  repudiation  of  debts,  and  so  far  as 
the  sovereign  possessed  and  exercised  the  right  of  fixing 
prices,  they  also  amounted  to  the  levy  of  a  tax  upon  the 
merchants  with  whom  these  sovereigns  dealt.  In  partial 
justification,  or  at  least  explanation,  of  this  abuse,  it  should 
be  said  that  the  laws  of  value  were  unknown  to  the  royal 
personages  of  the  Middle  Ages,  and  that  they  generally 
believed  that  they  possessed  both  the  right  and  the  ability 
to  fix  the  value  of  money  arbitrarily.  The  debasement  of 
coins  and  the  diminution  of  their  weight,  therefore,  were 
not  considered  as  criminal  acts,  but  as  the  exercise  of  a 
sovereign  right  and  a  sovereign  power.  Not  until  com- 
merce was  developed  to  such  an  extent  as  to  make  its  im- 
portance understood  by  kings  and  princes  did  the  voice  of 
the  merchant  class  make  itself  heard  in  protest  against  these 
practices,  and  correct  ideas  regarding  the  nature  and  func- 
tions of  money  become  a  part  of  the  common  knowledge 
of  business  men  and  other  well-informed  people.  The  pro- 
cess consisted  in  the  gradual  withdrawal  of  the  right  of 
coinage  from  all  private  persons,  and  in  the  development 


The  Elements  of  the  Medium  of  Exchange     69 

of  the  strictest  integrity  in  the  manufacture  of  coins  on  the 
part  of  pubHc  authorities.  At  the  present  time  coinage  is 
exclusively  a  government  function,  and  in  no  one  of  the 
great  nations  would  debasement  or  other  dishonest  prac- 
tices be  tolerated.  When  much  worn  by  usage  or  in  any 
other  way  defaced  or  reduced  in  weight  coins  are  usually 
withdrawn  from  circulation  by  public  authority  and  re- 
minted.  Perfect  confidence  is  thus  ensured.  Since  the  laws 
of  every  nation  contain  an  accurate  description  of  the  mate- 
rial, weight,  fineness,  and  devices  of  its  coins,  and  the  mints 
execute  these  laws  with  perfect  integrity,  there  is  no  oc- 
casion for  ignorance,  and  no  danger  is  involved  in  accept- 
ing metallic  money  at  its  face  value. 

In  the  preparation  and  maintenance  of  a  good  coinage 
system  several  important  problems  arise,  in  the  solution  of 
which  all  nations  have  been  guided  by  substantially  the 
same  considerations,  though  their  practices  differ  consid- 
erably in  detail.  Of  these  we  will  discuss  the  selection  of 
units  of  value  and  methods  of  reckoning,  the  size,  weight, 
and  fineness  of  coins,  and  their  names  and  devices. 

2.  Units  of  value  and  methods  of  reckoning. — Two  sys- 
tems of  reckoning  are  at  present  in  use,  which  we  will  desig- 
nate as  the  English  and  the  decimal.  The  former  is  the 
older  of  the  two,  having  been  employed  everywhere  in 
Europe  during  the  Middle  Ages,  while  the  latter  is  the  one 
in  common  use  at  the  present  time.  According  to  the  Eng- 
lish system  the  unit  is  the  pound  sterling,  which  is  divided 
into  twenty  parts  called  shillings,  each  of  which  is  further 
divided  into  twelve  parts  called  pennies,  and  these  again 
into  four  parts  called  farthings.  A  pound  is,  therefore, 
equal  to  twenty  shillings  or  two  hundred  and  forty  pence 
or  nine  hundred  and  sixty  farthings.  The  names  applied  to 
the  unit  and  its  subdivisions  have  been  different  in  the 
different  countries,  and  the  weight  and  materials  of  the 


70  Money  and  Banking 

coins  have  changed  many  times.  For  example,  the  names 
common  in  Germany  were  pfund,  schilHng,  and  pfennig, 
and  in  France  Hvre,  sol  or  sou,  and  denier.  It  is  probable 
that  the  English  unit  originally  was  a  pound  weight  of 
silver,  while  at  the  present  time  it  is  fixed  by  law  at  1 13.001 
grains  of  pure  gold. 

Everywhere  except  in  England  this  cumbrous  system  has 
been  abandoned  for  the  decimal,  according  to  which  the 
unit  is  divided  into  one  hundred  parts.  In  the  United 
States,  for  example,  we  call  our  unit  a  dollar,  and  the  hun- 
dredth part  of  it  a  cent;  in  Germany  the  name  of  the  unit 
is  a  mark,  and  of  the  hundredth  part  a  pfennig,  the  same 
name  formally  applied  to  a  two-hundred-and-fortieth  part 
of  the  old  unit.  The  corresponding  names  in  France  are 
franc  for  the  unit  and  centime  for  the  subdivision;  in  Italy 
lira  and  centesimo;  in  Austria  krone  and  heller,  formerly 
florin  and  kreiitzer;  and  in  Russia  ruble  and  kopeck.  The 
prevalence  of  the  decimal  system  is  due  to  its  superior  con- 
venience. It  is  much  easier  to  multiply  and  divide  by  ten 
and  its  multiples  than  by  twelve  and  twenty. 

In  the  determination  of  the  size  and  name  of  its  unit  of 
reckoning  each  nation  has  been  influenced  by  a  variety  of 
considerations,  many  of  which  have  been  peculiar  to  itself. 
It  is  difficult  to  change  a  system  already  in  vogue,  and  con- 
sequently historical  precedents  have  been  often  followed. 
In  the  United  States  the  fact  that  a  Spanish  coin  called  a 
dollar  was  in  general  circulation  at  the  time  our  monetary 
system  was  established  and  for  many  years  previous  to  that 
date,  doubtless  was  the  determining  factor  in  the  choice  of 
our  unit.  In  Europe  the  so-called  franc  system  is  the  most 
widely  extended,  partly  on  account  of  the  dominant  in- 
fluence of  France  among  the  nations  of  the  Latin  race,  and 
partly  on  account  of  the  inherent  merits  of  the  system  itself. 
In  consequence  of  the  very  different  circumstances  by  which 


The  Elements  of  the  Medium  of  Exchange     71 

the  several  nations  have  been  influenced,  a  large  number 
of  units,  however,  are  now  in  use.  From  the  point  of  view 
of  size  they  may  be  grouped  into  four  main  classes.  In  the 
first  class  belongs  the  English  pound  sterling,  which  is  the 
largest  of  all,  being  equivalent  to  nearly  five  of  our  dollars. 
To  the  second  class  belong  the  United  States  and  Canadian 
dollar,  the  Russian  ruble,  and  the  peso  of  several  of  the 
South  American  States.  Of  these  our  dollar  may  be  re- 
garded as  typical.  To  the  third  class  belong  the  old  florin 
of  Austria,  the  Horin  or  gulden  of  Holland,  and  the  krone 
of  the  Scandinavian  countries  and  Denmark.  As  a  type  of 
this  class  may  be  taken  the  Dutch  gulden,  which  is  worth 
about  forty  cents  of  our  money.  In  the  fourth  class  belong 
the  units  of  Germany,  France,  Spain,  Italy,  Belgium,  Swit- 
zerland, and  the  new  unit  of  Austria-Hungary.  Of  these 
the  French  franc,  worth  about  twenty  cents  of  our  money, 
may  be  taken  as  a  type.  It  must  be  remembered  that  the 
units  of  the  countries  here  classed  together  are  not  identical. 
Our  dollar  and  the  Russian  ruble,  for  example,  differ  in 
value  by  more  than  forty-eight  cents  but  they  have  this 
in  common,  that,  with  the  exception  of  the  English,  they, 
together  with  others  of  the  same  class,  are  the  largest 
units  now  in  use.  The  German  mark  and  the  French  franc 
differ  in  value  by  about  five  cents,  but  they  are  both  rela- 
tively small,  while  the  Dutch  gulden  and  the  old  Austrian 
florin,  though  not  identical  in  value,  in  size  range  between 
the  United  States  dollar  and  the  French  franc. 

In  the  determination  of  the  coins  to  be  minted  the  size 
of  the  unit  and  the  method  of  reckoning  are  important. 
As  a  rule  the  nations  with  small  units  have  coins  of  lower 
denominations  than  those  with  large,  the  smallest  repre- 
senting one-hundredth  part  of  the  unit.  The  countries 
which  use  the  franc  system  for  example,  usually  have  a 
coin  about  equivalent  to  one-fifth  of  a  cent.     The  other 


72  Money  and  Banking 

fractional  coins  which  are  most  common  wherever  the  deci- 
mal system  is  used  represent  values  equal  respectively  to 
two,  five,  ten,  twenty,  or  twenty-five  and  fifty  times  the 
smallest  coin.  In  France  and  Belgium,  for  example,  there 
are  five-,  ten-,  twenty-,  and  fifty-centime  pieces;  in  Ger- 
many, one-,  two-,  five-,  ten-,  twenty-,  and  fifty-pfennig 
pieces;  in  Austria-Hungry  one-,  two-,  five-,  ten-,  twenty-, 
and  fifty-heller  pieces ;  in  the  United  States  one-,  five-,  ten-, 
twenty-five-,  and  fifty-cents  pieces,  etc.,  etc.  Experience 
has  shown  that  coins  of  these  denominations  are  most  con- 
venient for  purposes  of  reckoning  and  making  change.  In 
the  English  system  the  subdivisions  are  quite  different,  the 
coins  in  most  common  circulation  being  the  half -penny, 
penny,  sixpence  (equivalent  to  six  pennies),  shilling  (equiv- 
alent to  twelve  pennies),  and  two-,  two-and-a-half,  five-, 
and  ten-shilling  pieces.  The  large  coins  almost  universally 
represent  five,  ten,  twenty,  and  sometimes  fifty  times  the 
value  of  the  unit,  paper  money  being  used  for  the  higher 
denominations. 

3.  The  size,  weight,  and  fineness  of  coins. — The  denomi- 
nations of  the  coins  once  determined,  the  size,  weight,  and 
substance  are  dictated  chiefly  by  convenience,  and  in  this 
respect  the  different  systems  exhibit  remarkable  similarity. 
In  the  countries  with  the  small  units  the  smallest  coin  and 
those  representing  two,  five,  ten,  and  twenty  times  its  value 
are  made  of  cheap  metals,  such  as  copper,  bronze,  or  nickel ; 
those  representing  half  the  value  of  the  unit  or  fifty  times 
the  value  of  the  smallest  coin,  the  unit,  and  its  multiples  up 
to  five,  are  made  of  silver,  and  the  coins  of  higher  denomi- 
nations of  gold.  In  other  countries  coins  of  corresponding 
value  are  made  of  the  same  metals.  In  the  United  States, 
for  example,  the  one-cent  piece  is  copper,  the  five-cent  piece 
nickel,  the  ten-,  twenty-five-,  and  fifty-cent  pieces  and  the 
dollar  coins  are  silver  and  the  others  gold.    In  England  the 


The  Elements  of  the  Medium  of  Exchange     73 

penny,  half-penny,  and  farthing  are  bronze,  the  sixpence, 
shilling,  two-,  two-and-a-half,  and  five-shilling  pieces  silver, 
and  the  coins  of  higher  denominations  gold.  In  Germany 
the  one-,  and  two-pfennig  pieces  are  copper,  the  five-  and 
ten-pfennig  pieces  nickel,  the  twenty-  and  fifty-pfennig, 
one-,  two-,  and  five-mark  pieces  are  silver  and  the  other 
coins  gold.  In  France  the  five-  and  ten-centime  pieces  are 
copper,  the  fifty-centime,  one-,  two-,  and  five-franc  pieces 
silver,  and  the  coins  of  higher  denominations  gold.  In- 
deed, as  nearly  as  the  size  of  their  respective  units  will 
permit,  the  coins  of  the  various  nations  correspond  to 
each  other  in  size,  weight,  and  substance,  a  fact  which  clear- 
ly shows  the  universal  dominance  of  commercial  interests 
in  monetary  matters.  Despite  the  fact  that  the  manufacture 
of  coins  is  a  government  monopoly  the  world  over,  and  de- 
spite the  differences  in  the  history,  political  characteristics, 
and  economic  and  social  policies  of  the  different  nations, 
common  commercial  needs  have  given  to  their  coinage 
systems  the  same  general  features. 

In  order  to  render  gold  and  silver  coins  more  durable 
and  thus  to  protect  them  as  much  as  possible  from  loss  by 
abrasion,  the  pure  metal  is  usually  mixed  with  copper  or, 
in  the  case  of  the  gold  coins,  sometimes  with  a  mixture  of 
copper  and  silver.  This  admixture  is  known  as  an  alloy, 
and  the  metal  thus  hardened  is  known  as  standard  gold  or 
standard  silver  to  distinguish  it  from  the  pure  metal.  The 
most  common  practice  at  the  present  time  is  to  use  nine 
parts  of  pure  gold  or  silver  to  one  part  of  alloy,  and  the 
coins  manufactured  from  metal  of  this  standard  are  said 
to  be  nine-tenths  fine.  The  process  of  increasing  largely 
the  proportion  of  alloy  to  pure  metal  is  called  debasement, 
a  practice  which,  as  we  have  previously  noted,  was  very 
common  in  the  Middle  Ages  and  was  one  of  the  reasons 


74  Money  and  Banking 

for  making  coinage  a  government  monopoly  and  for  sur- 
rounding it  with  all  possible  safeguards. 

4.  The  naming  and  stamping  of  coins. — The  naming  of 
coins  is  a  purely  arbitrary  matter,  and  practice  varies  wide- 
ly in  this  particular.  The  tendency  in  modern  timse  seems 
to  be  toward  employing  the  names  used  in  the  system  of 
accounting.  For  example,  in  this  country  we  commonly 
call  our  gold  coins  two-and-a-half-dollar,  five-dollar,  ten- 
dollar,  and  twenty-dollar  pieces.  The  official  names,  how- 
ever, are  the  quarter-eagle,  half-eagle,  eagle,  and  double- 
eagle,  these  names  being  derived  from  the  figure  of  an 
eagle  stamped  upon  one  side  of  the  coin.  In  England  the 
practice  of  employing  special  names  is  more  common,  her 
gold  coins  being  universally  known  as  the  sovereign  and 
half-sovereign,  and  her  silver  coins  as  crowns,  half-crowns, 
florins,  shillings,  and  sixpences.  With  the  exception  of 
the  two  last  mentioned  all  these  names  are  derived  from 
devices  on  the  coins  or  from  old  customs.  Until  compara- 
tively recent  times  this  practice  was  almost  universal,  the 
names  of  the  reigning  monarch  or  of  the  king  who  first 
ordered  the  coin  minted  being  the  most  commonly  employed. 
As  examples  may  be  mentioned  the  French  Napoleons,  the 
Prussian  Friedrich  d'ors,  and  the  English  George  d'ors. 
Such  devices  as  the  figure  of  an  angel,  a  lamb,  a  pig,  and 
the  rising  sun  gave  names  to  coins  of  considerable  impor- 
tance in  the  Middle  Ages.  Special  names  are  frequently 
conferred  upon  coins  by  popular  usage ;  as,  for  example,  in 
this  country  the  names  nickel  and  copper  for  our  five-cent 
piece  and  penny.  Our  twenty-five-cent  piece,  or  quarter  of 
a  dollar,  is  known  by  various  peculiar  names  in  different 
parts  of  the  country. 

Besides  the  purpose  of  ornamentation  the  devices 
stamped  upon  coins  are  designed  to  serve  as  means  of  pre- 
venting "sweating"  and  clipping  and  of  rendering  easy  the 


The  Elements  of  the  Medium  of  Exchange     75 

detection  of  abrasion.  The  milled  or  indented  edge,  the 
practice  of  stamping  both  sides,  and  the  circular  form  of 
coins  are  explained  in  this  way.  So  far  as  possible,  it  is 
also  desirable  to  use  designs  which  are  difficult  to  copy  and 
which  may  thus  aid  in  the  detection  of  counterfeits. 

5.  Seigniorage. — The  expenses  of  coinage  are  paid  in  two 
different  ways.  Sometimes  individuals  are  permitted  to 
bring  gold  or  silver  bullion  to  the  mints  and  have  it  trans- 
formed into  coin  absolutely  free  of  charge.  In  such  a  case 
the  expenses  of  coinage  are  paid  out  of  the  ordinary  reve- 
nues of  the  government  and  are  a  charge  upon  the  nation 
as  a  whole  in  the  same  sense  as  other  ordinary  public  ex- 
penditures. Sometimes,  however,  governments  exact  pay- 
ment for  coinage  in  the  form  of  the  retention  of  a  certain 
percentage  of  the  bullion  brought  to  the  mint  by  private 
individuals.  This  practice  is  entirely  similar  to  that  fre- 
quently employed  by  millers  in  rural  districts.  Farmers 
who  take  wheat  to  the  mill  usually  receive  in  flour  some- 
thing less  than  the  full  product,  the  miller  retaining  a  cer- 
tain amount  as  payment  for  his  services  and  the  use  of  his 
mill.  In  the  same  way  when  private  individuals  bring  gold 
and  silver  to  the  mint,  governments  sometimes  exact  a  toll 
in  the  form  of  a  certain  percentage  of  the  metal  deposited. 
The  amount  thus  exacted  is  called  seigniorage,  and  the  prac- 
tice of  meeting  the  expeditures  of  coinage  in  this  way  is 
ordinarily  known  as  the  taking  of  seigniorage. 

At  the  present  time  the  amounts  exacted  are  usually 
sufficient  simply  to  pay  the  actual  expenses  of  the  process, 
but  formerly  it  was  common  to  take  much  larger  sums. 
During  the  Middle  Ages  persons  who  possessed  the  right 
of  coinage  not  infrequently  retained  a  considerable  portion 
of  the  metal  which  was  brought  to  them.  On  account  of 
the  peculiar  notions  of  that  day  regarding  the  power  of 
monarchs  to  fix  arbitrarily  the  value  of  money  this  prac- 


76  Money  and  Banking 

tice  was  not  considered  in  any  sense  improper,  and  was  not 
supposed  to  involve  any  particular  injury  to  the  public.  In- 
deed, the  business  of  minting  was  looked  upon  as  a  proper 
source  of  public  revenue,  and  as  much  as  possible  was  made 
out  of  it. 

In  order  to  distinguish  between  the  practice  of  merely 
paying  necessary  expenses  by  means  of  this  toll  and  of  ex- 
acting an  additional  amount  for  the  purpose  of  gain,  a 
French  writer,  M.  Chevalier,  proposed  that  the  former  prac- 
tice be  known  by  the  name  of  brassage  and  the  latter  by  the 
name  of  seigniorage.  M.  Chevalier's  suggestion,  however, 
has  not  been  generally  followed,  and  the  term  seigniorage 
has  ordinarily  been  employed  to  apply  to  both  practices.  It 
would  be  better,  however,  not  to  use  the  term  seniorage 
to  apply  to  certain  gains  accruing  to  the  government  from 
coinage.  It  is  now  the  universal  practice  to  refuse  to  pri- 
vate individuals  the  right  to  have  silver  transformed  into 
subsidiary  coins,  and  since  their  intrinsic  value  is  always 
less  than  the  value  at  which  they  circulate,  a  considerable 
gain  may  accrue  to  the  government  from  their  manufacture. 
The  amount  of  profit  thus  derived,  however,  is  diminished 
and  may  be  entirely  offset  by  their  redemption  in  standard 
money,  to  which  the  government  is  usually  obligated  by 
law.  In  any  case,  the  gain  cannot  properly  be  classed  as  a 
charge  made  to  cover  the  expenses  of  coinage,  and  should, 
therefore,  be  separately  considered  and  not  confused  with 
seigniorage.  Our  government,  for  example,  has  derived 
some  profit  from  the  manufacture  of  silver  dollars,  coins 
which  until  recently  could  not  be  classed  as  subsidiary.  To 
put  such  profits  in  the  same  class  with  tolls  exacted  from 
persons  who  bring  gold  to  the  mint  is  to  confuse  two  very 
different  things,  and  such  confusion  is  almost  sure  to  arise 
when  the  term  seigniorage  is  applied  to  both.  In  view  of 
the  fact  that  this  term  is  often  used  to  mean  things  so  very 


The  Elements  of  the  Medium  of  Exchange     77 

different,  the  student  should  always  identify  the  sort  of 
charge  or  profit  referred  to,  and  consider  it  separately  and 
on  its  own  merits. 

Whether  or  not  it  is  desirable  to  take  seigniorage  is  still 
a  moot  question.    It  is  claimed,  on  the  one  hand,  that  coins 
perform  a  special  service,  and,  therefore,  possess  a  higher 
degree  of  utility  than  the  bullion  they  contain,  and  that 
this  should  be  represented  by  an  increase  in  their  value 
equal  at  least  to  the  expense  of  their  manufacture.     It  is 
frequently  said  that  there  is  no  more  reason  why  a  coin 
should  represent  the  exact  value  of  the  material  out  of  which 
it  is  made  than  that  a  steel  rail  should  have  the  same  value 
as  the  iron  it  contains.     It  is  also  urged  that  the  taking 
of  seigniorage  acts  as  a  check  upon  the  melting-down  and 
exportation  of  coin.     In  case  the  government  freely  trans- 
forms bullion  into  coin,  metal-workers  are  quite  as  apt  to 
secure  the  gold  and  silver  needed  for  their  purposes  by  the 
melting-down  of  coins  as  by  the  purchase  of  bullion  upon 
the  open  market.     Whenever  for  any  reason,  too,  there  is 
a  demand  for  gold  for  exportation,  coins  are  quite  as  apt 
to  be  sent  as  bullion,  if  their  market  value  is  precisely  the 
same.    If  no  seigniorage  is  charged,  it  is  urged,  the  govern- 
ment is  thus  obliged  to  incur  an  unnecessary  expense  in 
the  manufacture  of  coins  which  in  many  cases  remain  in 
circulation  for  only  a  short  period;  and  since  coins  are 
designed  for  purposes  of  circulation  only,  it  is  urged  that 
some  check  should  be  placed  upon  their  illegitimate  use. 

The  advocates  of  the  abolition  of  seigniorage,  on  the 
other  hand,  emphasise  the  importance  of  a  perfectly  free 
movement  of  the  precious  metals  from  country  to  country 
and  from  the  arts  to  the  mints  and  vice  versa.  A  proper 
distribution  of  the  precious  metals  throughout  the  world 
demands  that  they  should  flow  freely  from  one  country  to 
the  other  whenever  there  is  even  a  small  difference  in  value 


78  Money  and  Banking 

between  two  markets.  Any  obstruction  of  this  free  move- 
ment is  sure  to  produce  an  artificial  level  of  prices,  and  thus 
to  contribute  to  a  lack  of  stability  in  the  business  world.  It 
is  equally  important,  it  is  claimed,  that  a  proper  distribu- 
tion of  metals  between  their  various  uses  should  take  place, 
and,  hence,  that  no  more  gold  should  take  and  retain  the 
form  of  coin  than  is  necessary  for  the  economical  transac- 
tion of  the  commerce  of  the  world.  Every  encouragement 
possible,  therefore,  should  be  given  to  the  melting-down  of 
coins  for  use  in  the  arts  whenever  for  any  reason  their 
quantity  is  excessive.  In  reply  to  the  argument  that  the 
people  should  not  be  burdened  with  the  expense  of  mint- 
ing coins  which  are  destined  for  the  melting-pot  or  for  ex- 
portation, it  is  said  that  the  government  is  quite  as  much 
justified  in  furnishing  the  community  with  good  metallic 
money  at  the  general  expense  as  in  furnishing  a  good  judi- 
cial system  or  any  other  public  service. 

In  order  properly  to  weigh  these  arguments  a  number  of 
considerations  are  necessary  which  must  be  deferred  to 
later  chapters  of  this  book.  It  is  possible  here,  therefore, 
only  to  state  clearly  the  nature  of  the  questions  involved. 
First  of  all,  it  should  be  noted  that  at  the  present  time  the 
problem  of  seigniorage  concerns  only  standard  coin. 
There  is  no  difference  of  opinion  among  economists  or 
statesmen  regarding  the  proper  treatment  of  subsidiary 
coins,  and,  as  we  have  already  said,  it  is  questionable 
whether  the  term  seigniorage  should  be  applied  to  the  gains 
arising  from  the  minting  of  these.  That  gold  is  the  stand- 
ard of  value  of  the  most  important  nations  of  the  present 
day  and  that  its  more  extended  use  in  this  capacity  is  prob- 
able are  facts  which  also  affect  the  question,  especially 
when  the  constantly  increasing  use  of  credit  money  is  con- 
sidered. Since  gold  is  suitable  only  for  coins  of  large  de- 
nominations, and  since  many  forms  of  paper  money  can, 


The  Elements  of  the  Medium  of  Exchange     79 

therefore,  be  conveniently  substituted  for  it  in  the  ordinary 
circulating  medium,  the  chief  use  of  this  metal  tends  to  a 
greater  and  greater  extent  to  become  that  of  paying  bal- 
ances between  different  countries  and  between  different 
localities  in  the  same  country.  For  this  purpose  properly 
assayed  and  stamped  bars  of  bullion  can  be  used  quite  as 
well  as  coins.  The  nature  of  the  question  has  also  changed 
somewhat  on  account  of  the  increasing  importance  of  the 
freedom  and  ease  of  movement  of  gold  which  is  involved 
in  its  more  extended  use  in  the  payment  of  balances.  For 
these  reasons  the  importance  of  the  seigniorage  question  has 
somewhat  diminished,  and  the  power  of  governments  great- 
ly to  enhance  the  value  of  coins  by  such  a  charge  is  also 
much  less  than  formerly. 

6.  Inconvertible  government  notes. — By  these  are  meant 
government  notes  not  directly  or  indirectly  convertible  on 
demand  into  standard  coins.  The  most  noted  historical 
examples  of  this  form  of  currency  have  been  issued  by 
governments  in  times  of  fiscal  exigency,  and  have  consti- 
tuted a  forced  loan.  They  have  been  issued  in  fixed  de- 
nominations, made  legal  tender,  and  otherwise  fitted  for 
circulation  as  money  in  order  to  increase  their  service- 
ability as  a  fiscal  agency  rather  than  for  the  purpose  of  pro- 
viding commerce  with  an  ideal  monetary  instrument.  Few 
people  nowadays  would  recommend  their  use  as  a  medium 
of  exchange  except  as  a  kind  of  last  resort  when  other 
fiscal  means  have  failed  and  a  government  is  forced  to 
adopt  not  such  measures  as  it  would,  but  such  as  it  must. 
Nevertheless  it  is  important  and  instructive  to  note  the  dis- 
advantages of  this  form  of  currency,  this  being  the  price  the 
people  must  pay  for  its  use. 

Why  such  notes  depreciate,  take  the  place  of  metallic 
currency,  and  become  a  secondary  standard  of  value,  has 
been  explained  in  Chapter  IV.     The  disadvantage  of  this 


8o  Money  and  Banking 

procedure  is  the  rise  and  unsteadiness  of  prices  which  result. 
One  more  source  of  price  fluctuation,  namely,  variations  in 
the  depreciation  of  the  notes,  is  added  to  the  two  which 
may  be  regarded  as  normal,  namely  changes  in  the  value  of 
commodities  and  in  that  of  gold.  This  cause  of  price 
movements  is  much  more  capricious  than  the  other  two, 
since  subjective  influences  are  more  potent  in  this  than  in 
the  other  cases.  The  result  is  uncertainty  in  all  commercial 
calculations.  No  one  knows  what  the  value  of  money  may 
be  from  day  to  day  or  week  to  week.  The  only  certainty 
is  that  prices  will  be  unstable  and  subject  to  changes  from 
purely  subjective  influences.  Every  business  man  must 
either  suspend  operations  or  become  a  speculator.  Shrewd 
guessing  and  chance  take  the  place  of  sound  calculation 
and  enterprise.  The  effect  of  this  sort  of  thing  upon  in- 
dustry is  always  injurious  and  sometimes  deadly.  Even 
the  best  habits  are  not  always  proof  against  the  insidious 
influences  of  speculation  in  ordinary  times,  but,  when  sound 
business  methods  are  rendered  impossible  by  a  fluctuating 
currency  and  men  are  compelled  to  speculate  in  order  to 
live,  commercial  virtues  are  rendered  inoperative  and 
gambling  is  given  a  clear  field.  Even  moral  sensibilities  be- 
come blunted  under  such  circumstances,  and  business  men 
and  public  servants  practise  and  countenance  actions  which 
in  normal  times  would  not  be  tolerated.  Witness  the  grad- 
ual smothering  of  the  sentiment  of  financial  honor  and 
integrity  and  the  appearance  of  a  number  of  theories  in 
support  of  public  dishonesty  in  the  French  legislative  bodies 
during  the  regime  of  the  assignats  and  the  mandats,  and 
the  rapid  decay  of  legitimate  industry  under  the  blighting 
influence  of  the  fever  of  speculation  which  reigned  during 
that  period.*     Witness  also  the  greenback  heresy  in  the 

*  See  Andrew  D.  White's  pamphlet  on  "Paper  Money  Inflation  in 
France." 


The  Elements  of  the  Medium  of  Exchange     8i 

United  States  and  the  wild  monetary  theories  which  clouded 
the  vision  of  many  of  our  public  men  and  of  a  considerable 
portion  of  our  population  for  more  than  a  generation,  the 
evil  effects  of  which  have  not  yet  ceased  to  trouble  us. 
These  are  the  legitimate  fruits  of  inconvertible  government 
notes,  and  they  render  the  infliction  of  that  kind  of  cur- 
rency upon  a  people  one  of  the  greatest  of  national  calam- 
ities. 

7.  Convertible  government  notes. — This  class  of  notes  is 
characterized  by  the  fact  that  they  are  redeemable  on  de- 
mand in  coin,  and  are  thus  exempt  from  the  defect  of  de- 
preciation. Two  varieties  should  be  distinguished  and  sepa- 
rately considered : — 

A.  Silver  and  gold  certificates. — These  may  be  described 
as  notes  issued  to  take  the  place  of  certain  coins,  and  com- 
pletely covered  by  the  deposit  of  said  coins  in  the  public 
treasury.  As  typical  of  these  may  be  taken  our  silver  and 
gold  certificates.  The  former  were  issued  to  take  the  place 
of  silver  dollars,  which  were  not  readily  accepted  by  the 
people,  but  which  the  Bland  Act  practically  compelled  the 
Secretary  of  the  Treasury  to  force  into  circulation.  This 
act  ordered  the  coinage  into  silver  dollars  of  not  less  than 
two  nor  more  than  four  million  dollars'  worth  of  silver 
monthly.  Partly  on  account  of  their  inconvenient  size  and 
weight,  these  coins  were  speedily  transferred  to  the  treas- 
ury in  the  payment  of  public  dues  and  tended  to  remain 
there  in  lieu  of  gold  or  other  forms  of  currency.  The  ex- 
pedient was  therefore  tried  of  issuing  certificates  of  con- 
venient denominations  and  making  them  redeemable  on 
demand  in  silver  dollars,  a  number  of  which,  exactly  equal 
to  the  face  value  of  the  certificate  issued,  being  stored  away 
in  the  vaults  for  that  purpose.  The  expedient  succeeded, 
and  these  notes  have  constituted  a  part  of  our  circulation 
from  that  time  until  the  present  day.    Our  gold  certificates 


82  Money  and  Banking 

are  similar  in  character,  except  that  they  are  issued  in  large 
denominations  and  are  redeemable  in  gold. 

The  utility  of  this  class  of  notes  cannot  be  questioned. 
They  are  more  convenient  than  the  coin  they  represent,  and 
they  obviate  the  loss  which  is  necessarily  occasioned  by  the 
wear  and  abrasion  of  coins  in  circulation.  In  these  respects, 
however,  they  are  no  better  than  other  forms  of  paper  cur- 
rency of  the  same  denominations  and  like  them  redeem- 
able in  standard  money.  The  real  problem,  therefore,  con- 
cerns the  desirability  of  the  manufacture  of  the  classes  of 
coins  which  they  represent.  Regarding  gold  coins  there 
can  be  and  there  is  no  question  in  the  United  States.  So 
long  as  this  metal  continues  to  be  our  standard  of  value  we 
shall  need  to  put  it  up  in  the  form  of  coins,  and  since,  in 
such  cities  as  New  York,  Chicago,  Philadelphia,  and  Bos- 
ton, large  sums  must  daily  be  transferred  between  banks  in 
the  payment  of  balances,  gold  certificates  in  large  denomi- 
nations must  be  regarded  as  a  useful  and  economical  de- 
vice. Regarding  silver  dollars  a  just  decision  is  not  so  easy 
to  reach,  and  opinions  are  divided.  Gold  monometallists, 
as  a  rule,  believe  that,  if  they  are  to  be  retained  as  a  per- 
manent part  of  our  currency,  they  should  be  reduced  to  the 
grade  of  a  subsidiary  coin,  and  assimilated  in  weight  to  our 
half-  and  quarter-dollars  and  dimes. 

B.  Treasury  notes. — The  second  variety  of  convertible 
government  notes  referred  to  above  is  characterized  by  the 
fact  that,  while  the  government  guarantees  their  redemption 
in  standard  coin,  it  does  not  keep  an  deposit  for  that  pur- 
pose the  face  value  of  the  notes  and  does  not  retire  them 
when  once  redeemed,  but  treats  them  as  cash  and  pays  them 
out  again  for  ordinary  expenses  or  in  exchange  for  stand- 
ard coin.  A  good  illustration  is  furnished  by  our  so-called 
greenbacks  and  Sherman  notes.  The  former  is  an  in- 
heritance from  our  inconvertible  currency  period.     When 


The  Elements  of  the  Medium  of  Exchange     83 

specie  payments  were  resumed  in  1879,  something  over 
$346,000,000  of  the  old  notes  were  left  in  circulation.  The 
Secretary  of  the  Treasury  was  ordered  to  redeem  them  on 
demand  in  gold,  but  was  denied  the  power  to  retire  them. 
The  Sherman  notes  were  issued  under  authority  of  an  act, 
in  1890  directing  the  Secretary  of  the  Treasury  to  purchase 
every  month  at  its  market  value  4,500,000  ounces  of  silver, 
and  to  issue  in  payment  therefor  treasury  notes  redeemable 
either  in  gold  coin  or  silver  dollars  at  his  option.  Since 
the  act  also  made  it  the  duty  of  the  Secretary  to  main- 
tain all  forms  of  our  currency  at  a  parity  with  gold,  and 
since  the  metallic  value  of  silver  dollars  was  at  the  time 
btt  little  more  than  half  their  face  value,  the  redemption 
of  these  notes  on  demand  in  gold  was  a  practical  necessity. 
As  in  the  case  of  the  greenbacks,  the  Secretary  was  also 
forbidden  to  retire  these  notes.  Before  the  repeal  in  1893 
of  the  clause  of  this  act  authorizing  the  monthly  purchase 
of  silver  bullion  about  $150,000,000  worth  of  notes  were 
issued.  The  act  of  1900  provided  for  the  gradual  retire- 
ment of  these  notes.  Consequently  only  a  small  quantity 
are  at  the  present  time  in  circulation  and  these  will  be  grad- 
ually withdrawn.  Treasury  notes  similar  to  these  in  es- 
sentials have  been  circulated  from  time  to  time  in  other 
countries,  but  ours  is  the  most  notable  attempt  permanently 
to  maintain  a  circulating  medium  of  this  sort. 

In  considering  the  merits  and  defects  of  this  variety  of 
notes,  it  should  be  observed  that  the  only  rational  purpose 
of  their  employment  as  a  permanent  part  of  the  currency 
is  to  supplement  coin.  Unlike  the  silver  and  gold  certifi- 
cates considered  in  the  preceding  section,  they  are  not  in- 
tended to  circulate  in  the  place  of  certain  classes  of  coins. 
Oti  the  contrary,  they  are  only  partially  covered  by  a  coin 
reserve,  and  they  are  issued  for  the  purpose  of  expanding 
the  currency. 


84  Money  and  Banking 

In  a  previous  chapter  attention  was  called  to  the  im- 
portance of  elasticity  in  at  least  certain  of  the  paper  ele- 
ments of  the  currency,  on  account  of  the  fact  that  coin 
does  not  aiitonmtically  move  from  place  to  place  and  in- 
crease and  decrease  in  quantity  in  response  to  the  changing 
needs  of  commerce.  It  should  here  be  noted  that  treasury 
notes  of  the  sort  we  are  discussing  do  not  possess  this  very 
desirable  quality.  Indeed,  they  are  quite  as  inelastic  as 
metallic  money.  Their  issue  must  be  authorized  by  law 
and  their  quantity  strictly  limited.  It  would  be  quite  un- 
safe and  opposed  to  all  the  canons  of  sound  finance  to  per- 
mit the  Secretary  of  the  Treasury  or  any  other  public 
officer  to  issue  them  at  his  discretion,  and,  even  if  such 
power  were  granted,  the  notes  could  not  be  speedily  sent  to 
the  places  where  they  might  be  in  greatest  demand  or  their 
quantity  adjusted  to  commercial  needs.  Being  entirely  un- 
able to  measure  the  monetary  needs  of  different  localities, 
at  the  very  best  he  could  order  more  notes  printed  when 
in  his  opinion  the  currency  needs  expansion,  and  pay  them 
out  in  the  ordinary  course  of  business.  It  would  be  the 
merest  chance,  however,  if  the  persons  or  the  localities  to 
which  the  government  payments  were  due  were  those  in 
need  of  more  currency.  When,  as  is  and  always  must  be  the 
case,  the  quantity  to  be  issued  is  fixed  by  statute,  an  increase 
beyond  such  limit,  however  much  needed,  is  only  possible 
after  the  slow-moving  legislative  machinery  has  been  put 
into  operation  and  more  notes  authorized.  Moreover,  their 
withdrawal  from  circulation  by  redemption  in  coin,  when 
the  need  for  them  has  passed,  does  not  contract  the  cur- 
rency, but  simply  substitutes  coin  for  the  notes.  The  in- 
elasticity of  such  notes,  therefore,  must  be  conceded,  and 
their  maintenance  as  a  permanent  element  of  the  currency 
justified  on  some  other  ground,  if  at  all. 

The  second  defeat  of  convertible  treasury  notes  is  the 


The  Elements  of  the  Medium  of  Exchange     85 

fact  that  they  impose  upon  the  government  the  necessity  for 
keeping  on  hand  a  reserve  of  standard  coin  sufficient  to 
meet  at  any  and  all  times  the  demand  for  redemption. 
There  are  two  objections  to  the  assumption  by  government 
of  such  an  obligation. 

The  first  is  that  it  may  be  a  source  of  great  expense.  The 
coin  reserve  must  be  accumulated  by  taxation  or  loans,  and 
in  either  case  the  people  must  pay  the  bill.  If,  as  has  been 
proposed,  in  order  partially  to  overcome  this  difficulty,  the 
notes  are  never  paid  out  except  in  exchange  for  standard 
coin,  their  utility  as  a  means  of  expanding  the  currency  is 
destroyed,  the  quantity  of  notes  put  into  circulation  being 
exactly  equal  to  the  amount  of  coin  withdrawn. 

It  has  been  claimed  that  the  expense  of  a  coin  reserve  is 
more  than  offset  by  the  profit  accruing  to  the  government 
from  the  payment  of  a  portion  of  its  obligations  by  means 
of  non-interest-bearing  notes  only  partially  covered  by  the 
reserve.  This  seems  to  be  the  case  when  we  consider  simply 
the  beginning  of  the  history  of  the  notes.  If  the  reserve 
amounts  to  but  one-third  of  the  issues,  there  is  obviously  at 
the  beginning  a  clear  profit  amounting  to  two-thirds  of 
their  face  value.  Suppose,  however,  that  the  redemption 
of  the  entire  issue  should  be  demanded  three  times  in  the 
course  of  a  year.  The  original  reserve  would  be  exhausted 
when  one-third  of  the  notes  had  been  redeemed  once,  and 
must  be  replenished  from  one  of  three  sources :  either  from 
money  coming  into  the  treasury  through  the  channels  of  its 
ordinary  receipts,  from  the  product  of  a  special  tax,  or 
from  the  sale  of  bonds.  The  first  source  obviously  cannot 
be  relied  upon.  It  is  rarely  practicable  for  the  government 
to  exact  standard  coin  for  all  payments  due  to  it,  especially 
when  it  is  trying  to  circulate  its  own  notes.  It  would  be 
the  merest  chance,  therefore,  if  the  requisite  amount  of 
standard  coin  were  paid  in  by  the  government's  debtors. 


86  Money  and  Banking 

But  certainty  on  this  point  would  not  remove  all  diffi- 
culties, since  the  coin  paid  in  might  be  required  for  ordinary 
expenses,  in  which  case  it  would  not  be  available  as  a  re- 
demption fund.  Even  the  adoption  of  the  policy  of  surplus 
financiering  would  not  insure  the  existence  of  a  coin  sur- 
plus just  at  the  times  when  redemption  of  notes  might  be 
demanded.  The  levy  of  a  special  tax  for  the  replenishment 
of  an  exhausted  reserve  is  quite  out  of  the  question.  The 
machinery  of  taxation  is  necessarily  slow  in  its  operation, 
and  cannot  be  relied  upon  to  furnish  funds  for  sudden  exi- 
gencies, such  as  the  one  we  are  considering. 

The  sale  of  bonds  in  such  an  emergency  seems,  therefore, 
to  be  necessary,  and  this  involves  the  payment  of  an  annual 
interest  charge  which  may  much  more  than  counterbalance 
the  profit  accruing  from  the  original  issue  of  the  notes. 
If,  according  to  our  assumption,  redemption  three  times 
in  the  course  of  a  year  were  demanded,  and  bonds  payable 
one  year  or  more  after  date  were  issued  to  procure  the 
necessary  coin,  in  the  course  of  a  year  the  face  value  of 
the  bonds  outstanding  would  be  three  times  as  great  as 
that  of  the  notes,  and  the  expense  incurred  by  the  govern- 
ment would  be  treble  the  ordinary  rate  of  interest  on  the 
face  value  of  the  notes. 

If  we  assume  with  the  advocates  of  this  form  of  cur- 
rency, that  redemption  in  large  quantities  is  an  unusual  and 
rare  occurrence,  and  consequently  that  the  expense  involved 
in  the  issue  of  bonds  for  the  replenishment  of  the  reserve 
is  not  often  incurred,  we  must  still  remember  that  danger 
from  this  source  is  always  imminent,  and  hence  that  such 
notes  at  the  best  always  introduce  an  element  of  uncertainty 
into  the  finances  of  the  government.  Whenever  for  any 
reason  the  reserve  falls  below  its  ordinary  limit,  the  ability 
of  the  government  to  maintain  specie  payments  is  placed 
in  question.     No  one  knows  what  the  Secretary  of  the 


The  Elem.  nts  of  the  Medium  of  Exchange     87 

Treasury  may  do  or  what  action  Congress  may  take.  A 
"panicky"  feeling  is,  therefore,  Hable  to  be  produced,  which 
is  certain  to  affect  the  value  of  all  sorts  of  negotiable  se- 
curities, to  render  business  unstable,  and,  if  other  disturb- 
ing circumstances  concur,  to  produce  a  commercial  crisis. 

Our  own  experiences  with  these  notes  illustrates  the  ob- 
jections which  have  been  mentioned,  and  furnishes  the 
best  argument  against  their  use.  Though  the  amount  of 
the  gold  reserve  was  not  fixed  by  law,  it  early  become  cus- 
tomary to  keep  on  hand  at  least  a  hundred  millions  of 
dollars.  Between  1879,  the  date  of  the  resumption  of  specie 
payments,  and  1890  the  Secretaries  of  the  Treasury  were 
aided  in  the  maintenance  of  this  reserve  by  an  annual  sur- 
plus of  revenues  over  receipts  and  by  a  constantly  increas- 
ing demand  for  currency,  occasioned  in  part  by  our  rapidly 
expanding  commerce  and  in  part  by  a  decrease  in  the  cir- 
culation of  bank-notes.  In  spite  of  these  favoring  cir- 
cumstances, however,  in  1885  and  1886  *  the  reserve  fell 
to  near  the  danger  point  and  occasioned  anxiety.  In  1890 
occurred  two  events  which  soon  disclosed  the  danger  to 
which  Congress  had  subjected  the  treasury  and  the  country 
when  it  assumed  the  obligation  to  maintain  a  currency  of 
convertible  treasury  notes.  One  was  the  passage  of  the 
Sherman  act,  to  which  reference  has  already  been  made, 
and  the  other  was  the  discontinuance  of  the  policy  of  sur- 
plus financiering  occasioned  by  the  passage  of  the  so-called 
McKinley  bill.  The  former  act  added  in  three  years  $150,- 
000,000  of  new  notes  to  the  $346,000,000  of  greenbacks, 
thus  dangerously  increasing  the  burden  placed  upon  the  gold 
reserve,  and  the  latter  soon  substituted  an  annual  deficit 
for  the  former  surplus.  The  gold  reserve  showed  the  effect 
of  the  changed  conditions.  It  fell  in  1892  to  $114,000,000, 
in  October,  1893,  to  $81,551,385,  and  in  1894  to  $68,000,- 
*  Taussig's  "Silver  Situation." 


88  Money  and  Banking 

000.*  The  "panicky"  conditions  thus  produced,  combined 
with  various  other  circumstances,  brought  on  a  crisis  in 
1893,  which  was  accompanied  by  a  large  foreign  demand 
for  gold.  The  result  was  the  establishment  of  the  so-called 
"endless  chain,"  which  revealed  in  the  most  complete 
fashion  the  true  nature  of  our  currency  of  treasury  notes. 
The  gold  reserve  was  first  reduced  far  below  the  $100,000,- 
000  limit  by  the  redemption  of  notes.  The  treasurer  was, 
then,  compelled  to  sell  gold  bonds  in  order  to  replenish  it, 
and  the  redeemed  notes  were  put  again  into  circulation  in 
the  usual  manner.  This  process  was  four  times  repeated, 
and  it  was  discovered  that,  in  some  instances  at  least,  the 
very  firms  who  had  purchased  bonds  and  thus  transferred 
gold  to  the  Government  withdrew  it  very  soon  thereafter 
by  presenting  notes  for  redemption.  In  all,  bonds  to  the 
amount  of  nearly  $300,000,000  were  issued,  and  the  end- 
less chain  was  temporarily  broken  by  a  contract  with  a 
syndicate  of  bankers  by  which  they  agreed  to  supply  gold 
to  the  treasury  in  the  payment  of  bonds  sold  them  at  profit- 
able rates,  and  to  prevent,  so  far  as  possible,  the  presen- 
tation of  notes  for  redemption.  The  danger  of  the  repeti- 
tion of  this  humiliating  and  expensive  experience  was  par- 
tially removed  in  1900  by  an  act  which  fixed  the  minimum 
gold  reserve  at  $150,000,000  and  took  from  the  Secretary 
of  the  Treasury  the  power  to  reissue  redeemed  notes  ex- 
cept in  return  for  gold  coin.  As  has  already  been  re- 
marked, the  efficiency  of  a  regulation  of  this  sort  depends 
upon  the  extent  to  which  it  transforms  the  notes  into  or- 
dinary gold  certificates,  and  its  necessity  accordingly  is  a 
proof  of  the  practical  impossibility  of  maintaining  a  cur- 
rency of  this  sort  without  endangering  the  safety  of  our 
financial  institutions  and  the  credit  of  the  government. 
A  comparison  between  these  notes  and  subsidiary  coin 
*  Noyes's   "Thirty   Years   of   American   Finance." 


The  Elements  of  the  Medium  of  Exchange    89 

may  be  instructive.  They  are  alike  in  having  an  intrinsic 
value  less  than  their  face  value,  and  in  being  maintained 
at  par  in  the  circulation  by  redemption  on  demand  in  gold. 
They  are  unlike,  however,  in  the  fact  that  the  intrinsic 
value  of  subsidiary  coin  is  considerable,  while  that  of  gov- 
ernment notes  is  practically  nil,  and  in  the  fact  that  the 
former  are  not  likely  to  be  presented  for  redemption,  while 
the  temptation  is  very  great  to  secure  the  redemption  of 
the  latter  whenever  gold  is  greatly  needed.  These  differ- 
ences are  a  sufficient  explanation  of  the  reason  why  sub- 
sidiary coinage  is  safe  and  treasury  notes  dangerous.  In 
the  case  of  the  former  the  government  assumes  a  risk 
equal  only  to  the  difference  between  their  intrinsic  and  their 
face  value,  while  in  the  case  of  the  latter  the  government 
has  no  security  whatever  for  the  risk  assumed.  Nothing 
can  take  the  place  of  subsidiary  coins  in  the  circulation, 
and  consequently  the  demand  for  small  change  may  be 
relied  upon  to  keep  them  in  circulation,  provided  the  quan- 
tity issued  is  not  excessive,  while  bank-notes,  silver  and 
gold  certificates,  and  gold  and  silver  coin  can  easily  be 
made  to  fill  the  place  of  treasury  notes  in  the  circulating 
medium,  and  their  presentation  for  redemption  is  facili- 
tated by  the  fact  that  in  no  other  way  can  gold  coin  for 
exportation  or  any  other  purpose  be  so  easily  and  cheaply 
obtained. 

The  conclusion  to  which  we  are  forced  by  the  considera- 
tions presented  in  this  chapter  is  that  no  form  of  paper  cur- 
rency based  entirely  or  largely  upon  government  credit  is 
to  be  recommended.  Subsidiary  coins  of  relatively  high 
intrinsic  value  and  gold  or  silver  certificates  represented 
dollar  for  dollar  by  gold  and  silver  coin  do  not  belong 
under  this  head  and,  consequently,  may  without  danger  be 
made  permanent  elements  of  a  currency  system.  Incon- 
vertible government  notes,  however,  or  convertible  notes 


90  Money  and  Banking 

based  upon  a  partial  reserve  are  dangerous,  the  former  in 
a  degree  which  renders  their  use  a  national  calamity,  and 
the  latter  to  such  an  extent  that  the  nation  which  employs 
them  may  confidently  expect  occasions  when  its  treasury 
will  be  embarassed,  if  not  humiliated,  by  them  and  its  credit 
system  seriously  disturbed  and  perhaps  thrown  into  the 
paroxysms  of  a  commercial  crisis. 

REFERENCES 

The  nature  and  purposes  of  coinage  are  discussed  in  Laughlin,  ch. 
ii ;  Kinley,  ch.  iii ;  Jevons,  ch.  vii. ;  Walker,  Money,  ch.  ix ;  and  Lexis, 
"Miinzwesen,"  in  the  Handworterbuch  der  Staatswissenschaften. 

On  the  details  of  the  monetary  systems  of  the  various  States,  see 
Tate,  Modern  Cambist;  Norman,  Universal  Cambist  and  Complete 
Guide  to  the  World's  Twenty-nine  Metal  Monetary  Systems;  Muhle- 
man.  Monetary  Systems  of  the  World;  "The  World's  Currencies  "  in 
Sound  Currency,  v.  vii.  No.  8;  Haupt,  Arbitrages  et  Parites;  and 
Lejeune,  Monnaies,  Poids  et  Mesures  des  Principaux  Pays  du  Monde. 

On  the  subject  of  seigniorage  see,  in  addition  to  the  above  refer- 
ences, Johnson,  pp.  187-194;  Martin,  Seigneurage  and  Mint  Charges; 
Seyd,  The  Question  of  Seigniorage  and  the  Charge  for  Coining;  and 
Nasse,  ch.  vi. 

Inconvertible  government  notes  are  condemned  by  all  political  econ- 
omists, but  the  objections  to  them  are  not  always  identical  with  those 
given  in  the  text.  The  following  discussions  are  valuable :  Walker, 
Money,  chs.  xiv-xvii,  and  Money,  Trade,  and  Industry,  chs.  viii  and  ix ; 
White,  Money  and  Banking,  2d  ed.  bk.  11,  ch.  iii ;  Mill,  Political  Econ- 
omy, bk.  Ill,  ch.  xiii ;  Johnson,  chs.  xiii  and  xiv. ;  Wagner,  Die  rus- 
sische  Papierwdhrung,  chs.  i-vii ;  and  Hertzka,  Wdhrung  and  Handel. 

On  the  history  of  our  own  experience  with  this  sort  of  currency,  see 
Mitchell,  A  History  of  the  Greenbacks;  Laughlin,  pp.  477-490;  Knox, 
United  States  Notes,  chs.  i,  ii,  iii,  and  ix ;  Linderman,  Money  and  Legal 
Tender  in  the  United  States;  Sumner,  History  of  American  Currency, 
ch.  i;  Davis,  Currency  and  Banking  in  the  Province  of  Massachusetts 
Bay;  and  Report  of  the  Comptroller  of  the  Currency  for  1879.  On  our 
experience  with  silver  certificates  see  Taussig,  Silver  Situation  in  the 
United  States;  Noyes,  Thirty  Years  of  American  Finance,  ch.  iv;  and 
Knox,  ch.  X.  The  history  of  our  greenbacks  and  treasury  notes  is  ad- 
mirably presented  by  Noyes ;  see  also  Knox,  chs.  ix  and  xi,  and  Pro- 
fessor Laughin's  Report  of  the  Indianapolis  Convention,  pt.  iii. 


The  Elements  of  the  Medium  of  Exchange      91 

On  French  experience  see  White,  Paper  Money  Inflation  in  France; 
Courtois,  Histoire  des  Banques  en  France;  Vuhrer,  Historie  de  la 
Dette  Publique  en  France,  v.  i,  chs.  xiii  and  xiv. 

For  the  experience  of  other  countries  see  Wagner,  Die  russische 
Papierwdhrung;  Ferraris,  Mnneta  e  corso  Forzoso;  and  Kramar,  Das 
Papiergeld  in  Oesterreich  seit  1848. 


CHAPTER  VI 
CREDIT 

As  a  basis  for  the  discussion  of  bank  currency,  an  element 
of  the  medium  of  exchange  still  to  be  considered,  the 
subject  of  credit  requires  a  more  complete  explanation  than 
has  been  given  it  in  the  preceding  chapters. 

I.  Meaning  of  the  term. — The  word  credit  is  used  in  dif- 
ferent senses  in  ordinary  parlance  and  in  scientific  writings, 
and  many  attempts  to  formulate  a  definition  of  it  have 
been  made.*  These  definitions  differ  chiefly  in  the  em- 
phasis they  place  upon  one  or  another  aspect  of  credit  trans- 
actions but  they  agree  substantially  in  the  phenomena  they 
are  attempting  to  define,  namely  an  exchange  transaction  in 
which  one  person  parts  with  goods  or  valuables  on  condi- 
tion of  receiving  a  return  for  them  in  the  future.  The  es- 
sentials of  this  phenomena  are  the  exchange  and  the  element 
of  time  or  the  fact  that  the  second  part  of  the  transaction 
is  deferred  or  follows  the  first  after  the  lapse  of  an  ap- 
preciable interval.  Exchange  in  political  economy  means  a 
trade  or  a  giving  of  one  commodity  for  another.  Two  goods, 
two  persons,  and  two  transfers  are  always  involved.  It  is 
in  transactions  of  this  kind  and  of  this  kind  only  that  credit 
appears.  There  is  no  credit  element  in  a  gift  or  a  robbery 
or  in  any  kind  of  a  transaction  in  which  the  trading  of  goods 
is  not  the  essential  feature.  But  credit  does  not  appear  in  all 
exchange  transactions;  only  in  those  in  which  one  of  the 
transfers  is  deferred.    If  goods  are  sold  and  paid  for  on  the 

*For  a  list  of  typical  definitions,  see,  Laughlin's  "Money,"  p.  72, 
note. 

92 


Credit  93 

spot  the  transaction  is  not  one  of  credit.  If  they  are  sold 
on  time,  that  is,  to  be  paid  for  at  some  future  date,  credit 
appears  and  the  trade  becomes  a  typical  credit  transaction. 
Loans  are  also  credit  transactions,  since  they  are  transfers 
of  economic  goods,  one  of  which  is  deferred  to  some  future 
date. 

The  reason  for  calling  this  kind  of  an  exchange  transac- 
tion credit  is  because  it  implies  trust  or  confidence,  and  the 
word  credit  is  etymologically  connected  with  this  idea.  No 
one  willingly  parts  with  his  goods  or  valuables  on  condi- 
tion of  a  future  return  unless  he  feels  confident  that  the 
return  will  be  forthcoming.  The  basis  of  this  confidence 
will  be  considered  later. 

2.  The  advantages  of  credit. — The  advantages  of  credit 
may  be  considered  from  the  standpoint  of  the  person  who 
employs  it  or  from  that  of  the  nation.  A  person  employs 
credit  either  to  procure  an  immediate  gratification  of  wants, 
to  increase  his  capital,  or  to  render  the  capital  he  already 
possesses  more  efficient.  The  first  use  may  be  illustrated  by 
a  hungry  man  without  means  who  buys  food  on  time  or 
makes  a  loan  and  purchases  food  with  the  proceeds,  or 
by  a  student  who  runs  in  debt  for  food,  clothes,  books  and 
other  things  he  consumes  during  the  period  of  his  education, 
or  by  a  high-liver  who  buys  an  automobile  on  credit  or  by 
means  of  borrowed  funds.  The  magnitude  of  this  class  of 
credit  transactions  is  small  compared  to  that  of  the  second 
and  third  classes.  In  all  the  great  nations  of  the  world  a 
large  proportion  of  the  capital  employed  in  industrial  and 
commercial  enterprises  is  obtained  by  means  of  credit. 
Every  great  corporation  borrows  a  part  of  its  working 
capital;  in  a  sense  the  funds  represented  by  the  capital 
stock  of  all  corporations  are  obtained  by  means  of  credit. 
Private  persons  and  partnerships  engaged  in  business  bor- 
row continually.     The  custom  of  selling  goods  on  time  is 


94  Money  and  Banking 

almost  universal.  It  is  chiefly  the  result  of  the  lengthening 
of  the  process  of  production  by  the  introduction  of  more 
and  more  highly  capitalistic  methods  and  of  the  extension 
of  the  territory  over  which  commerce  is  carried  on.  The 
continual  introduction  of  more  and  more  highly  specialized 
machinery,  and  the  division  of  the  process  of  manufactur- 
ing into  a  larger  and  larger  number  of  units  has  greatly 
lengthened  the  period  of  time  intervening  between  the  be- 
ginning of  the  production  of  a  commodity  and  its  comple- 
tion. Credit  is  used  as  a  means  of  bridging  over  this  period. 
For  example,  the  cotton  manufacturer  may  find  it  advan- 
tageous to  purchase  his  cotton  on  the  condition  that  he  pay 
for  it  after  he  has  turned  it  into  cloth  and  placed  this  on  the 
market,  or,  what  amounts  to  the  same  thing,  to  borrow  the 
funds  needed  for  the  purchase  of  the  cotton.  The  whole- 
sale dealer  can  operate  with  much  less  capital  in  hand, 
if  he  is  able  to  bridge  over  the  period  of  time  which  must 
elapse  between  the  purchase  of  his  goods  from  the  manu- 
facturer and  their  sale  to  the  retailer  by  means  of  a  loan  or 
a  purchase  on  time.  When  the  buyer  and  seller  of  goods 
are  widely  separated  a  longer  time  is  required  to  ship  and 
market  the  goods  and  credit  is  used  to  bridge  over  this 
period.  The  use  of  bank  deposits,  one  of  the  most  impor- 
tant forms  of  credit,  is  another  means  of  increasing  the 
efficiency  of  one's  capital. 

From  the  standpoint  of  the  nation  the  chief  advantages 
of  credit  are  the  more  complete  utilization  of  its  human  and 
natural  resources  and  the  increase  in  the  efficiency  of  its 
capital.  The  talents,  skill,  aptitudes  and  tastes  of  the 
various  people  constituting  a  nation  vary  widely,  and,  in 
order  completely  to  utilize  these  for  purposes  of  production, 
it  is  necessary  that  its  capital  and  natural  resources  should 
be  placed  in  the  hands  of  those  best  fitted  to  employ  them. 
Credit  is  a  means  to  this  end.    It  enables  the  man  who  has 


Credit  95 

great  ability  as  an  organizer  and  director  of  industrial  pro- 
cesses to  secure  the  capital  and  natural  agencies  needed 
for  the  utilization  of  his  special  ability,  and  it  also  enables 
the  capital  of  the  man  who  has  little  or  no  capacity  to  use  it 
to  further  the  work  of  production  in  the  most  efficient  man- 
ner. These  advantages  of  credit  have  so  much  impressed 
certain  writers  that  they  have  regarded  the  increase  of  a 
nation's  capital  as  one  of  the  functions  of  credit.  This, 
however,  is  an  error.  Credit  cannot  create  capital.  It  can 
facilitate  the  process  which  terminates  in  its  creation  and 
can  increase  its  efficiency. 

3.  Credit  Instruments. — In  order  effectively  to  use  credit 
a  variety  of  written  documents  have  been  devised  to  which 
the  name  credit  instruments  has  been  given.  Those  in  com- 
mon use  either  take  the  form  of  open  accounts  or  book 
credit,  promises  to  pay  or  orders  to  pay.  An  open  account 
is  a  statement  of  a  series  of  credit  transactions  in  which 
what  is  received  by  a  person  and  what  he  parts  with  in 
return  is  recorded  in  such  a  form  as  to  make  comparisons 
between  the  two  easy  and  the  striking  of  a  balance  at  any 
time  possible.  A  person  is  said  to  be  debited  with  what  he 
receives  and  credited  with  what  he  parts  with,  and  the 
balance  at  any  time  represents  w^hat  he  owes  or  what  the 
person  with  whom  he  is  dealing  owes  him.  The  credit  trans- 
actions between  a  grocer  and  a  farmer  may  be  repre- 
sented by  such  an  account,  the  farmer  being  debited  on  the 
grocer's  book  with  the  amount  of  his  purchases  and  credited 
with  the  amount  of  his  sales.  At  the  end  of  a  month  or  a 
year  a  balance  between  the  debits  and  the  credits  may  be 
struck  and  the  amount  paid  by  the  farmer  to  the  grocer, 
in  case  the  debits  have  exceeded  the  credits,  or  by  the  grocer 
to  the  farmer  in  case  the  credits  have  exceeded  the  debits. 
Another  extensively  used  form  of  open  account  is  the  bank 
deposit.     In  this  the  customer  of  a  bank  is  credited  with 


g6  Money  and  Banking 

the  money,  checks,  drafts,  notes,  etc.,  sold  to  the  bank  and 
debited  with  the  checks  he  draws  against  it. 

Written  promises  to  pay  are  expressed  in  different  forms 
according  to  the  character  and  needs  of  the  parties  to  the 
contract.  Of  these  the  most  common  are  promissory  notes, 
bank  notes,  certificates  of  deposit,  government  notes  and 
bonds. 

A  promissory  note  is  an  unconditional  written  promise  of 
one  person  to  pay  on  demand  or  at  a  fixed  or  determinable 
future  date  a  sum  of  money  to  another  person  or  to  his 
order  or  to  bearer,  that  is,  to  any  person  who  may  present 
it.  Various  forms  are  in  common  use.  One  is  the  fol- 
lowing : 

$100.00  March  5,  1908. 

Six  months  after  date,  for  value  received,  I  promise 
to  pay  to  John  Doe  One  Hundred  Dollars,  with  in- 
terest at  six  per  cent,  per  annum  until  paid. 

(Signed)     Richard  RoK. 

A  bank-note  is  an  unconditional  promise  of  a  bank  to  pay 
to  bearer  on  demand  a  certain  sum  of  money.  The  follow- 
ing is  an  example: 


The  Exchange  Bank  of  Madison 
will  pay  to  bearer 
Five  Dollars  on  demand. 
Cashier  President 


A  "certificate  of  deposit"  is  "in  effect  a  promissory  note 
given  by  a  bank  to  a  depositor,  acknowledging  the  receipt 
of  the  deposit  and  promising  to  pay  it  to  the  depositor." 


Credit  97 

Governments  sometimes  issue  promises  to  pay  in  a  form 
essentially  like  that  of  a  bank-note.  The  so-called  "green- 
backs" or  United  States  notes  at  present  in  circulation  in 
the  United  States  are  examples,  as  are  also  the  silver  and 
gold  certificates  and  the  Sherman  notes. 

Bonds  are  promises  to  pay  issued  by  an  industrial  or 
public  corporation  to  persons  who  lend  it  funds.  Those 
of  industrial  corporations  are  frequently  secured  by  mort- 
gage upon  some  or  all  the  property  of  the  concern,  and  for 
the  payment  of  bonds  of  states  and  other  public  bodies 
certain  taxes  or  other  revenues  are  sometimes  pledged. 
This  particular  kind  of  credit  instrument  is  issued  in  a 
variety  of  forms  and  known  by  different  names  according 
to  the  character  of  the  security,  the  rate  of  interest  paid, 
the  length  of  the  period  of  time  before  maturity,  the  pur- 
pose of  its  issue,  etc.,  etc. 

A  bill  of  exchange  may  be  defined  as  an  unconditional 
order  addressed  by  one  person  called  the  drawer  to  another 
called  the  drawee  requiring  him  to  pay  a  third  person  called 
the  payee  a  sum  named.  The  drawee  may  be  asked  to  in- 
dicate his  willingness  to  pay  the  bill  by  writing  his  name 
across  its  face,  in  which  case  he  becomes  the  acceptor. 
Bills  of  exchange  may  be  made  payable  at  sight,  that  is, 
on  presentation  to  the  drawee,  in  which  case  they  are  called 
sight  bills,  or  after  the  lapse  of  a  designated  period  of 
time,  in  which  case  they  are  called  time  bills.  In  case  this 
period  is  short,  say  ten  days  or  less,  they  are  sometimes 
called  short  bills,  and  long  bills  if  the  period  is  longer  than 
this.  If  the  bill  is  drawn  upon  a  banker,  it  is  called  a 
banker's  bill,  if  it  is  drawn  upon  a  merchant  and  represents 
goods  shipped  and  consigned  to  him  it  is  called  a  trade  bill. 
According  to  the  character  of  the  goods  involved,  these 
latter  are  frequently  called  cotton  bills,  grain  bills,  etc.  The 
term  draft  is  commonly  applied  in  this  country  to  a  banker's 


g8  Money  and  Banking 

bill  drawn  by  one  banker  upon  another.  In  case  such  a 
bill  represents  a  loan  transaction,  it  is  frequently  called  a 
finance  bill.  A  check  is  a  bill  drawn  by  a  depositor  against 
his  credit  account  at  a  bank.  According  as  the  drawee  lives 
in  the  same  country  as  the  drawer  or  in  a  different  state  or 
country,  the  bill  is  known  as  a  domestic  or  a  foreign  bill. 
Other  terms  and  classifications  are  employed  dependent 
upon  the  peculiar  customs  and  laws  of  the  different  cen- 
ters at  which  bills  are  drawn  and  negotiated. 

The  chief  differences  in  the  form  of  these  credit  instru- 
ments are  due  to  the  peculiarities  of  the  uses  to  which  they 
are  put.  Some  of  them  are  designed  to  serve  as  a  general 
medium  of  exchange,  and  to  this  end  must  be  payable  to 
bearer,  must  be  issued  in  fixed  and  convenient  denomina- 
tions, and  must  be  made  universally  acceptable.  To  this 
class  belong  various  kinds  of  government  notes  and  bank 
notes.  Others  are  designed  to  serve  as  a  medium  of  cer- 
tain kinds  of  exchanges  only,  and  these  need  to  possess  the 
qualities  essential  to  these  particular  uses.  Certain  kinds 
of  bank  deposits,  for  example,  are  intended  to  be  used  as  a 
medium  of  exchange  between  people  who  have  access  to 
banks,  and  who  find  coin,  government  notes,  bank  notes, 
etc.,  inconvenient  for  some  of  their  purposes  as,  for  example, 
in  the  making  of  large  payments  and  payments  at  a  dis- 
tance. The  check  was  designed  to  be  used  in  connection 
with  this  kind  of  deposit,  also  bank  drafts,  circular  letters 
of  credit,  etc.  Some  credit  instruments  are  designed  pri- 
marily to  meet  the  needs  of  people  who  want  to  make  in- 
vestments, as,  for  example,  bonds  and  various  kinds  of 
promissory  notes.  Within  each  of  these  groups  sub-groups 
may  be  distinguished  in  which  the  forms  of  the  credit  in- 
struments are  still  further  differentiated  to  suit  more  highly 
specialized  uses.  For  example,  checks,  drafts,  and  letters 
of  credit  are  designed  to  meet  different  needs,  though  they 


Credit  99 

may  be  considered  together  for  the  purpose  of  contrasting 
them  with  government  and  bank  notes.  A  great  variety  of 
bonds  is  employed  to  suit  the  needs  of  different  classes  of 
investors.  The  same  may  be  said  of  promissory  notes  and 
trade  and  bank  bills.  The  process  of  differentiating  credit 
instruments  to  meet  new  needs  and  better  to  adapt  them 
to  old  uses  is  continually  in  progress. 

4.  The  foundations  of  credit. — The  utility  of  a  credit  in- 
strument in  facilitating  the  transfer  of  capital  depends 
quite  as  much  upon  the  security  back  of  it  as  upon  the 
suitability  of  its  form.  If  there  is  doubt  regarding  the 
fulfillment  of  the  obligation  it  records,  its  usefulness  will 
be  impaired,  possibly  completely  destroyed,  however  per- 
fect its  adaption  in  form  to  the  purposes  it  was  designed 
to  serve.  It  is  this  element  of  security  we  are  now  to 
consider. 

In  its  completed  form  every  credit  instrument  records  the 
obhgation  of  some  person  to  pay  to  another  a  specified  sum, 
usually  described  in  terms  of  the  prevailing  standard  of 
value.  The  fulfillment  of  that  obligation  obviously  depends 
upon  the  ability  and  willingness  of  this  person  to  pay  the 
debt  thus  contracted  and  upon  the  social  arrangements 
for  compelling  payment  in  case  of  default.  A  person's 
ability  to  pay  depends  primarily  upon  the  amount  and  the 
saleability  of  the  wealth  in  his  possession  at  the  time  his 
debt  falls  due.  Obviously  he  cannot  hand  over  to  another 
what  he  does  not  possess,  but  to  the  extent  of  his  pos- 
sessions he  is  able  to  satisfy  creditors,  provided  those  pos- 
sessions are  saleable.  At  the  time  the  obligation  is  con- 
tracted his  ability  to  meet  it  is  not  necessarily  measured 
by  the  amount  and  saleability  of  the  wealth  then  in  his  pos- 
session. In  the  interval  before  the  maturity  of  the  debt  he 
may  lose  what  he  had  at  that  time  or  he  may  acquire  more. 
In  the  usual  case  of  a  loan  made  for  productive  purposes, 


100  Money  and  Banking 

the  wealth  likely  to  be  produced  in  the  interval  is  the  chief 
element  in  the  determination  of  his  ability  to  pay. 

The  saleability  of  wealth  depends  upon  its  form  and 
upon  the  condition  of  trade.  Some  forms  of  wealth  are  so 
constantly  and  so  generally  needed  and  the  machinery  for 
marketing  them  is  so  perfect  that  they  can  be  sold  at  any 
time,  while  other  forms  for  which  the  demand  is  not  so 
general  and  so  constant  or  for  the  sale  of  which  the 
machinery  is  not  so  perfect  cannot  be  so  easily  and  quickly 
sold.  On  account  of  these  differences  some  forms  of 
wealth  are  better  adapted  to  credit  operations  than  others. 
There  are  no  forms,  however,  which  may  not  be  so  used 
under  certain  circumstances.  The  phrase  condition  of  trade 
refers  to  the  degree  of  perfection  of  the  operation  of  the 
machinery  of  commerce,  that  is,  of  the  transportation  and 
banking  systems,  of  the  produce  and  stock  exchanges, 
of  the  arrangements  for  buying  and  selling,  for  the  adjust- 
ment of  supply  and  demand  along  all  lines,  and  for  the 
regulation  of  the  relations  between  labor  and  capital,  etc., 
etc.  This  machinery  may  work  perfectly  or  it  may  be  more 
or  less  impaired.  For  one  reason  or  another  it  occasionally 
almost  completely  breaks  down.  The  foundations  of  credit 
are  then  seriously  undermined  whatever  be  the  forms  or  the 
amount  of  the  wealth  in  the  hands  of  the  debtors. 

A  person's  willingness  to  pay  his  debts  is  an  important 
factor  in  his  credit,  since  few  people  would  continue  to  lend 
or  sell  goods  on  time  to  a  man,  however  great  his  financial 
ability,  who  compelled  his  creditors  to  resort  to  legal  pro- 
cesses to  obtain  their  dues.  He  must  also  be  willing  to 
pay  promptly  as  well  as  ultimately,  if  he  expects  to  have 
credit  commensurate  with  his  wealth. 

The  laws  of  all  civilized  nations  provide  for  the  collection 
of  debts  which  have  been  legally  contracted  by  putting  the 
creditor  in  possession  of  a  sufficient  amount  of  the  property 


Credit  loi 

of  the  debtor  to  satisfy  his  claim.  These  laws  are  the 
result  of  a  long  process  of  development  and  are  calculated 
to  meet  almost  any  contingency  that  may  arise.  They  are 
essential  to  the  existence  of  a  highly  developed  credit  sys- 
tem such  as  the  great  nations  of  the  world  enjoy  at  the 
present  time.  Serious  imperfections  in  such  laws  or  laxity 
in  their  enforcement  are  evidence  of  backwardness  in  civil- 
ization and  seriously  obstruct  the  commercial  and  industrial 
life  of  a  people. 

The  fact  that  the  amount  promised  to  be  paid  is  usually 
expressed  in  terms  of  the  standard  of  value  is  probably 
responsible  for  a  widespread  belief  that  credit  is  based  on 
standard  money.  This  is  not  true  in  the  sense  that  the 
amount  of  a  person's,  a  corporation's,  or  a  nation's  credit  is 
measured  by  their  command  of  standard  coins.  It  is 
measured  rather  by  their  wealth,  productivity,  integrity, 
legal  arrangements  for  the  collection  of  debts,  etc.  Neither 
is  this  statement  true  in  the  sense  that  the  payment  of  the 
obligations  contracted  must  ultimately  be  met  by  means  of 
standard  money.  Most  of  them  will  ultimately  be  can- 
celled by  an  offset  of  similar  obligations.  The  process  by 
which  this  is  accomplished  will  be  fully  explained  in  subse- 
quent parts  of  this  book.  It  is,  however,  true  that  standard 
coins  and  the  standard  commodity  play  an  important  role 
in  the  credit  system  of  a  country. 

For  reasons  explained  in  the  previous  chapter  there  is  in 
every  country  a  demand  for  standard  coins.  The  demand 
usually  takes  the  form  of  requests  addressed  to  banks 
for  the  encashment  of  credit  instruments  which  serve  as 
a  medium  of  exchange.  It  is  of  prime  importance  to  the 
credit  system  of  a  country  that  the  banks  be  able  to  meet 
these  demands  and  to  this  end  they  must  keep  on  hand  an 
adequate  supply  of  standard  coins  or  be  able  readily  to 
procure  a  supply.     What  constitutes  an  adequate  supply 


102  Money  and  Banking 

varies  with  the  same  bank  at  different  times  and  with 
different  banks  at  the  same  time  and  has  no  fixed  relation 
to  the  magnitude  of  credit  transactions.  If  the  supply- 
is  inadequate,  that  portion  of  the  credit  system  which  de- 
pends upon  the  banks  for  its  support  is  in  danger  of  break- 
ing down,  and  if  it  does  break  down  or  becomes  seriously 
impaired,  a  crisis  ensues  with  all  its  attendant  suffering  and 
losses.  The  kernel  of  truth  in  the  claim  that  credit  is 
based  on  standard  money  is  revealed  by  these  facts.  A  sup- 
ply of  standard  coins  equal  to  the  demands  of  the  com- 
munity for  that  kind  of  money  is  essential  to  the  main- 
tenance of  the  credit  system,  but  these  demands  are  variable 
and  may  be  modified  by  various  expedients.  The  presence 
of  wealth  in  the  many  forms  required  to  satisfy  the  peo- 
ple's needs  and  its  possession  by  the  persons  who  have 
assumed  the  obligations  expressed  by  credit  instruments  is 
equally  essential  to  the  maintenance  of  the  credit  system, 
and  for  this  there  is  and  can  be  no  substitute.  Upon  this 
we  may  rely  even  when  standard  money  fails,  and  the 
various  methods  of  obtaining  substitutes  for  standard 
money  have  this  in  common, — that  they  directly  or  indi-' 
rectly  liquidize  or  transmute  into  currency  other  forms  of 
wealth. 

5.  Credit  and  prices. — The  extensive  use  of  credit  instru- 
ments as  a  medium  of  exchange  has  given  them  an  in- 
fluence over  prices  which  it  is  important  to  note.  The 
nature  of  that  influence  has  been  explained  in  the  preced- 
ing chapter  where  it  was  shown  that  the  demand  for  the 
standard  commodity  is  affected  by  the  extent  to  which  sub- 
stitutes for  standard  coins  are  provided.  It  is  in  their 
capacity  to  serve  as  such  substitutes  that  credit  instruments 
exert  influence  on  prices.  If  the  form  and  security  of  these 
instruments  is  such  as  to  render  them  universally  acceptable 
they  may  perform  all  the  functions  of  standard  coins  in  the 


Money  and  Banking  103 

medium  of  exchange  and  completely  take  their  place  in 
these  uses ;  that  is  to  say,  they  may  serve  the  public  as  hand- 
to-hand  money  and  the  banks  as  reserves.  They  cannot 
serve  as  a  safety  fund  or  guarantee  for  the  ultimate  re- 
deemability  of  the  credit  portion  of  a  currency,  and  in  this 
use  only  are  they  incapable  of  serving  as  a  substitute  for 
standard  coins. 

The  extent  to  which  credit  instruments  will  be  substituted 
for  such  coins  depends  upon  custom,  statutory  regula- 
tions, and  the  condition  of  trade.  The  influence  of  cus- 
tom is  seen  in  the  differences  in  the  extent  to  which  green- 
backs and  other  government  notes  are  used  as  hand-to- 
hand  money  on  the  Pacific  Coast  and  in  other  parts  of  this 
country.  They  are  equally  available  everywhere,  but  the 
people  on  the  coast  prefer  to  use  gold,  probably  because  they 
have  become  accustomed  to  it.  The  influence  of  statutory 
regulations  may  also  be  observed  in  this  country  where 
banks  are  permitted  to  count  in  their  reserves  balances  to 
their  credit  in  other  banks  and  various  forms  of  government 
notes;  also  in  England  where  the  absence  of  statutory 
regulations  has  left  the  joint-stock  banks  free  to  use  as  their 
reserves  balances  in  the  Bank  of  England,  Bank  of  England 
notes  and  short  time  loans,  as  well  as  coin.  The  condition 
of  business  is  of  prime  importance  in  this  connection.  If  the 
machinery  of  commerce  is  impaired,  confidence  between 
man  and  man  is  likely  to  weaken,  fear  to  accept  credit  in- 
struments, lest  the  obligations  they  represent  may  not  be 
met,  to  spread, and  the  presentation  of  credit  instruments  for 
encashment  in  standard  coins  to  take  place.  This  means 
the  withdrawal  of  credit  instruments  from  their  use  as  a 
substitute  for  standard  coins  and  a  consequent  increase 
in  the  demand  for  the  latter.  This  happens  in  times  of 
crisis  and  is  the  chief  cause  of  the  extreme  money  strin- 
gency which  characterizes  such  periods. 


104  Credit 

REFERENCES 

The  nature  of  credit  and  its  relation  to  prices  are  discussed  in  Laugh- 
lin,  ch.  iv;  Kinley,  ch.  viii ;  Johnson,  chs.  iii  and  xv;  Jevons,  ch.  xxvi; 
Nicholson,  ch.  vi ;  and  Macleod,  Theory  of  Credit,  v.  ii,  pt.  i,  ch.  xii, 
and  Theory  and  Practice  of  Banking,  v,  i,  ch.  iv,  sec.  ii.  In  the  first 
three  mentioned  books  also  bibliographies  of  the  subject  may  be  found. 

A  discussion  and  description  of  credit  instruments  is  given  in  Cleve- 
land, Funds  and  Their  Uses,  and  in  Macleod,  Theory  and  Practice  of 
Banking,  v.  i,  ch.  iv,  sec.  iv. 

Various  classes  of  bonds  with  their  characteristics  as  financial  in- 
struments are  treated  in  Lough,  Corporation  Finance;  and  Lownhaupt, 
Investment  Bends. 


CHAPTER  VII 
BANK  CURRENCY 

The  most  widely  used  forms  of  currency  at  the  present 
day  are  supplied  by  commercial  banks  whose  functions  and 
operations  must  now  be  described. 

I.  Origin  and  development  of  banking  institutions. — First 
of  all  we  must  note  the  fact  that  these  institutions  have 
changed  very  much  in  character  since  their  origin,  and 
consequently  now-a-days  perform  many  functions  unknown 
to  those  of  former  times.  The  first  banks  seem  to  have 
arisen  in  connection  with  the  business  of  exchanging  money. 
In  ancient  times  and  especially  in  the  Middle  Ages  the 
varieties  of  coins  were  greater  even  than  at  the  present 
day,  and  they  were  much  less  perfectly  and  honestly 
minted.  Specialists  were,  therefore,  required  to  determine 
their  exact  value  and  equivalence,  and  to  exchange  coins  of 
one  mintage  for  those  of  another,  and  their  services  were 
in  great  demand  at  fairs  and  other  places  where  merchants 
of  different  nations  met  for  purposes  of  trade.  Inasmuch 
as  they  kept  their  boxes  or  chests  of  coins  on  benches  or 
"banken,"  the  name  bankers  came  to  be  applied  to  them. 
On  acount  of  their  technical  knowledge  and  the  fact  that 
they  were  obliged  constantly  to  keep  on  hand  considerable 
quantities  of  the  precious  metals,  this  business  in  the  early 
Middle  Ages  was  usually  carried  on  by  goldsmiths,  but 
later  it  was  sometimes  assumed  by  the  governments  of 
large  commercial  cities,  as,  for  example,  by  Amsterdam 
in  1609,  by  Hamburg  in  16 19,  and  by  Niirnberg  in  1621. 
Of  these  latter  the  Bank  of  Amsterdam  was  the  most  im- 

105 


io6  Money  and  Banking 

portant  and  may  be  regarded  as  typical  of  these  early  in- 
stitutions. 

In  the  early  seventeenth  century  the  city  of  Amsterdam 
was  the  center  of  the  international  trade  of  Europe,  and 
accordingly  the  coins  of  all  nations  were  there  in  circula- 
tion. These  were  of  so  many  varieties  and  forms  and  of 
such  different  degrees  of  reliability,  and  some  of  them  were 
so  worn  and  defaced  by  long  usage  and  the  practice  of  clip- 
ping, that  merchants  found  it  difficult  to  keep  themselves  in- 
formed regarding  their  true  worth  and  were  exposed  to 
the  danger  of  great  loss  if  they  accepted  them  at  their  face 
value.  The  city,  therefore,  established  a  bank  to  which 
merchants  took  their  coins,  receiving  therefor  credit  to  the 
amount  of  the  value  of  the  metal  they  contained.  Pay- 
ments were  then  made  by  transferring  credit  on  the  bank's 
books  from  one  person  to  another.  That  is  to  say,  a  person 
who  owed  a  sum  of  money  to  another  accompanied  him  to 
the  bank  and  ordered  the  amount  transferred  from  his  own 
account  to  that  of  his  creditor.  Bank  money,  as  these  book 
accounts  or  the  written  orders  to  transfer  them  were  called, 
thus  acquired  a  premium  over  the  debased  and  mutilated 
coins  in  circulation,  and  for  generations  constituted  the 
basis  of  all  the  foreign  exchanges  of  the  city.  It  was  the 
means  of  substituting  order  for  the  financial  chaos  which 
reigned  previously,  and  contributed  greatly  to  the  pros- 
perity of  Dutch  commerce. 

On  account  of  the  fact  that  these  early  bankers  were 
obliged  to  provide  themselves  with  strong  boxes  and  other 
facilities  for  protection  against  robbers,  fire,  etc.,  it  became 
customary  for  other  persons  to  entrust  to  them  their  money 
and  other  valuables  for  safe-keeping,  and  after  a  time  this 
feature  of  their  business  became  quite  as  important  as 
money-changing  and  ultimately  more  so.  A  third  function 
was  assumed  when  bankers  acquired  the  habit  of  loaning 


Bank  Currency  107 

at  interest  the  funds  left  with  them  for  safe-keeping.  This 
was  made  possible  by  the  fact  that  their  receipts,  which 
were  supposed  to  represent  actual  cash  on  deposit  in  their 
strong  boxes,  and  which  were  redeemable  on  demand,  were 
quite  as  readily  accepted  in  payments  as  coin  and  thus  cir- 
culated from  hand  to  hand  as  money.  Considerable  quan- 
tities of  coin  thus  remained  with  the  bankers  for  long 
periods  of  time  without  being  called  for,  and  they  finally 
acquired  the  habit  of  loaning  it  out  at  interest  for  short 
periods  of  time,  keeping  on  hand  only  a  quantity  sufficient 
to  meet  current  demands. 

From  the  earliest  times  also,  bankers  have  been  the  chief 
agents  through  which  intermunicipal  and  foreign  exchanges 
have  been  conducted.  As  dealers  in  coin  and  bullion  they 
had  outside  connections  and  a  knowledge  of  outside  affairs 
not  possessed  by  other  merchants,  and  were,  therefore,  in  a 
position  to  undertake  the  settlement  of  accounts  between 
people  living  in  different  places  by  means  of  orders  drawn 
on  bankers  in  other  countries  or  other  cities  with  whom 
they  had  regular  business  transactions.  As  keepers  of  other 
people's  money  they  also  promoted  saving,  and  banks  thus 
became  in  time  the  chief  savings  institutions  of  the  country. 

The  relative  importance  of  these  various  functions  has 
changed  considerably  with  the  development  of  industry  and 
commerce,  and  a  differentiation  has  taken  place  between  in- 
stitutions, some  specializing  in  one  direction  and  others  in 
another.  For  example,  at  the  present  time  money-changing 
has  become  relatively  unimportant,  and  is  carried  on  only  by 
a  few  banks  situated  in  those  places  where  travellers  from 
one  country  to  another  need  to  exchange  coins,  and  often  by 
establishments  not  now-a-days  regarded  as  banks  in  the 
proper  sense  of  that  term.  Some  institutions  emphasize  the 
promotion  and  facilitation  of  saving  almost  exclusively,  and 
are  hence  called  Savings  Banks.     Others  provide  special 


io8  Money  and  Banking 

facilities  for  the  safe-keeping  of  securities  of  all  sorts,  and 
are  therefore  called  Safe  Deposit  Companies.  Some  banks 
specialize  in  the  conduct  of  foreign  exchanges,  and  others 
do  almost  exclusively  a  domestic  business.  Commercial 
banks,  as  the  most  numerous  class  is  now  called,  specialize 
in  the  conduct  of  exchanges,  and  it  is  with  these  that  we  are 
chiefly  concerned  in  this  book.  Their  principal  operations 
will  now  be  described. 

2.  Deposits. — Customers  of  a  commercial  bank  sell  to  it 
their  surplus  cash  and  credit  instruments  representing  pay- 
ments due  them  from  ot-her  persons,  and  make  loans  from  it 
secured  by  their  personal  notes  due  in  the  future.  For  the 
amounts  due  them  as  a  result  of  these  transactions  they 
are  credited  on  the  books  of  the  bank  in  a  form  known  as 
deposits.  This  credit  account  usually  attested  also  by  a 
little  book  kept  by  the  depositor,  known  as  the  pass  book, 
gives  the  customer  the  right  to  call  upon  the  bank  for  legal- 
tender  money,  or  for  a  transfer  to  the  credit  of  some  other 
person  of  all  or  some  part  of  the  amount  due  him.  Some 
deposits  give  the  right  to  demand  payment  at  any  time  with- 
out notice  and  others  only  after  the  lapse  of  a  certain  time 
from  the  date  of  demand.  Time  deposits,  as  the  latter  are 
called,  are  sometimes  also  attested  by  a  special  instrument 
known  as  a  certificate  of  deposit,  in  which  the  terms  of  the 
contract  between  the  bank  and  the  customer  are  carefully 
specified. 

When  the  depositor  wishes  to  make  use  of  his  right  to 
secure  payment  from  the  bank,  he  writes  an  order,  tech- 
nically known  as  a  check,  for  the  amount  desired,  payable 
to  himself  or  to  some  other  person,  which  order,  when 
presented  to  the  bank,  is  either  paid  in  cash  or  credited  to 
the  account  of  the  payee.  The  amount  thus  paid  or  credited 
is  then  debited  to  the  account  of  the  creditor. 

3.  Loans  and  discounts. — Making  loans  and  discounts  is 


Bank  Currency  109 

a  function  correlative  with  that  of  conducting  deposit  ac- 
counts. It  may  be  described  as  the  process  of  advancing 
funds  on  the  security  of  personal  notes  and  bills  of  ex- 
change, payable  at  some  future  date,  the  funds  advanced 
consisting  of  cash  or  of  deposits  subject  to  check,  or,  as  the 
exchange  of  cash  or  deposits  subject  to  check  for  such  notes 
and  bills.  The  term  discount  is  properly  used  to  describe 
this  process  when  the  interest  charge,  the  consideration  the 
bank  receives  for  making  the  advance  or  exchange,  is  paid 
in  advance  or  at  the  time  the  transaction  takes  place.  The 
term  loans  is  broad  enough  to  include  discounts  as  well  as 
advances  the  interest  on  which  is  paid  when  the  note  or 
the  bill  falls  due. 

In  addition  to  their  own  notes  or  bills  of  exchange  per- 
sons securing  advances  may  transfer  to  the  bank  as  security 
other  credit  instruments  or  forms  of  property  with  the 
right  to  collect  or  sell  them  for  its  reimbursement  in  case 
the  note  or  bill  in  question  is  not  paid  when  due.  Loans 
thus  secured  are  called  collateral  loans  and  the  securities 
or  property  deposited  collateral.  For  this  purpose  high 
class  bonds  and  stocks,  real  estate  mortgages,  and  bills  of 
lading  and  warehouse  receipts  representing  goods  in  transit 
or  in  store  are  widely  used.  In  financial  centers  the  securi- 
ties listed  on  the  stock  exchanges,  sometimes  called  stock 
exchange  securities,  constitute  desirable  collateral  on  ac- 
count of  their  ready  salability. 

4.  Deposits  as  currency. — By  means  of  loans,  discounts 
and  deposits,  banks  conduct  exchanges  of  commodities  with 
as  great  and  in  most  cases  with  greater  facility,  economy 
and  safety  than  they  are  conducted  by  means  of  hand-to- 
hand  money.  This  fact  may  be  made  clear  by  the  following 
illustration :  Suppose  five  customers  of  a  bank,  whom  we 
shall  call  A,  B,  C,  D,  and  E,  each  having  commercial  trans- 
actions with  the  other,  have  their  notes  discounted  each  to 


no  Money  and  Banking 

the  amount  of  one  hundred  dollars  and  receive  in  compen- 
sation credit  balances  at  the  bank,  each  to  that  amount.  A 
then  buys  a  bill  of  goods  of  B  valued  at  one  hundred  dol- 
lars, but,  instead  of  paying  him  in  coin  or  government 
notes,  gives  him  an  order  on  the  bank.  This  order  may- 
be simply  a  verbal  command  to  transfer  A's  balance  to  B's 
credit,  or  it  may  be  a  written  order  to  that  effect.  In  either 
case  A's  balance  at  the  bank  is  reduced  to  zero  and  B's  in- 
creased to  two  hundred  dollars.  B  now  contracts  an  obliga- 
tion in  favor  of  C  to  the  amount  of  one  hundred  dollars, 
and  pays  him  in  like  manner,  thus  reducing  his  balance 
to  the  old  figure  and  raising  C's  to  two  hundred  dollars. 
Next  in  order  C  makes  a  hundred  dollar  purchase  of  D,  D 
of  E,  and  E  of  A,  each  paying  by  a  transfer  of  credit  on 
the  bank's  books  in  favor  of  his  creditor.  The  result  is  that 
at  the  end  of  the  five  transactions  each  man  has  a  balance 
of  one  hundred  dollars  at  the  bank,  and  is  thus  in  a  condi- 
tion to  repeat  the  process  just  described,  and  business  to 
the  amount  of  five  hundred  dollars  has  been  transacted 
without  the  use  of  coin  or  government  notes.  The  deposit 
account  thus  serves  as  means  of  payment  or  currency,  and 
must  be  regarded  as  an  element  of  the  medium  of  exchange 
coordinate  with  hand-to-hand  money. 

5.  Bank  notes. — Besides  the  deposit  account,  certain 
banks,  known  as  banks  of  issue,  make  use  of  so-called  bank- 
notes. These  are  promises  of  the  bank  to  pay  specified 
sums  to  the  bearer  on  demand.  They  are  designed  to  serve 
as  hand-to-hand  money  and  hence  are  issued  in  such  de- 
nominations as  are  convenient  for  this  purpose.  They  are 
usually  printed  on  specially  prepared  paper,  though  they 
may  be  written,  and  are  signed  by  the  responsible  officers 
of  the  bank,  in  this  country  by  the  president  and  the 
cashier. 

In  many  respects  bank-notes  and  deposits  resemble  each 


Bank  Currency  iii 

other.  Both  represent  obligations  of  the  bank  to  pay  on 
demand.  Both  are  used  in  making  advances  to  customers 
or  in  exchange  for  promissory  notes  and  bills  of  exchange. 
Both  serve  as  means  of  payment  and  are  therefore  elements 
of  the  medium  of  exchange.  They  differ  in  that  the  bank 
note  is  payable  to  bearer  and  is  issued  in  fixed  denomina- 
tions, while  the  deposit  is  made  available  by  means  of 
checks,  which  are  orders  instead  of  promises  to  pay,  which 
are  drawn  for  any  amount  to  suit  the  transactions  in  which 
they  are  used,  and  which  must  be  presented  to  the  bank  for 
payment  or  acceptance  before  their  validity  can  be  tested. 
On  account  of  these  differences  bank  notes  serve  as  hand-to- 
hand  money,  while  deposits  are  used  in  large  payments  and 
in  payments  at  a  distance.  For  many  purposes,  of  course, 
they  may  be  used  indifferently. 

The  relative  importance  of  these  two  banking  devices, 
measured  by  the  extent  of  their  use,  has  greatly  changed 
during  the  last  century,  the  deposit  account  having  every- 
where and  continually  gained  over  its  competitor.  In 
great  commercial  centers  at  the  present  time  more  than 
fifty  per  cent,  of  all  exchanges  are  probably  made  by  its 
means.  In  the  early  days  of  banking  in  this  and  other 
countries  the  deposit  as  a  checking  account  played  a  very 
inferior  role,  bank-notes  being  essential  to  the  existence 
of  banking  institutions  and  being  consequently  almost  ex- 
clusively employed.  In  this  country  the  dominance  of  the 
deposit  dates  less  than  half  a  century  back. 

6.  The  advantages  of  bank  currency. — Bank  currency,  as 
the  deposit  account  and  bank-notes  may  be  called,  is  in 
certain  respects  superior  to  other  forms.  Besides  being 
able  to  transform  their  notes  and  bills  of  exchange  into 
funds  immediately  available  for  purposes  of  commerce, 
business  men  derive  great  advantage  from  its  superior  con- 
venience, safety  and  elasticity.     This  is  due,  in  the  first 


112  Money  and  Banking 

place,  to  the  fact  that  this  currency  exists  in  a  variety  of 
forms,  each  adapted  to  definite  commercial  needs.  The 
check,  for  example,  is  a  very  convenient  and  safe  means 
of  making  large  payments.  It  takes  less  time  to  write  into 
the  printed  forms,  now  furnished  by  all  banks,  the  name 
of  your  creditor,  the  amount  to  be  paid  him,  the  date,  and 
your  own  signature,  than  to  count  out  a  large  number  of 
notes  or  coins,  and  in  this  way  the  danger  of  loss  from 
mistakes  in  counting  is  also  avoided.  Your  creditor  finds 
the  check  more  convenient  and  safe  than  coin  or  notes, 
because  it  is  less  bulky,  and,  if  he  chances  to  lose  it,  he  can 
procure  a  duplicate  and  direct  the  bank  not  to  honor  the 
original  if  it  is  ever  presented  for  payment.  Furthermore, 
the  stub  of  a  check-book  constitutes  a  convenient  record 
of  expenditures.  For  payments  at  a  distance,  as  in  another 
town  or  country,  banks  furnish  a  convenient  currency  in  the 
form  of  drafts,  that  is,  orders  of  one  bank  upon  another 
to  pay  to  the  person  named  or  to  his  order  a  specified  sum. 
These  can  be  conveniently  and  cheaply  sent  by  mail,  and, 
if  lost,  like  checks,  can  be  duplicated.  For  travelers  in 
foreign  countries  banks  furnish  so-called  letters  of  credit 
for  any  amount  needed.  These  enable  the  holder  to  obtain 
at  any  place  of  commercial  importance  any  sum  he  may  de- 
sire in  the  money  of  the  country  in  which  he  is  traveling. 
These,  too,  can  be  duplicated  if  lost.  The  commercial  letter 
of  credit  makes  it  easy  for  merchants  to  pay  for  goods 
bought  in  any  part  of  the  world  or  to  receive  payment  for 
goods  sold  without  inconvenience,  delays  or  danger  of 
loss.  Bank-notes,  which  may  be  issued  in  any  and  all 
denominations,  can  be  used  in  all  ordinary  commercial 
transactions ;  they  are  more  convenient  than  coin  for  all 
purposes  except  small  change,  and  are  quite  as  convenient 
as  government  notes,  being  in  all  external  respects  identical 
with  them. 


Bank  Currency  113 

By  the  elasticity  of  bank  currency  is  meant  its  capacity 
to  adapt  itself,  as  it  were  automatically,  to  the  varying  needs 
of  commerce.  We  have  just  learned  that  banks  are  able 
to  supply  the  various  forms  of  currency  needed,  and  it  only 
remains  to  show  that  they  can  also  supply  these  in  the 
amounts,  at  the  times,  and  in  the  places  required.  The 
amount  of  bank  currency  depends  primarily  upon  the  needs 
and  desires  of  the  customers  of  banks,  among  whom  now- 
a-days  are  to  be  found  all  business  men  and  large  numbers 
of  people  otherwise  engaged  or  living  without  labor.  As 
we  have  already  shown,  it  is  created  by  the  processes  of 
discount  and  deposit,  and  enters  into  circulation  when 
the  customers  of  banks  pay  out  the  notes  received  or  make 
use  of  their  credit  balances  by  transferring  them  to  others 
by  means  of  checks.  So  long,  therefore,  as  banks  are  able 
to  continue  discounting  the  paper  of  their  customers  the 
amount  of  bank  currency  can  be  increased,  and,  assuming 
that  banks  exist  in  sufficient  numbers  in  all  places  where 
business  is  carried  on,  this  currency  will  come  into  circula- 
tion in  the  places  where  it  is  in  demand  and  at  times  when 
it  is  needed.  Any  business  man  can  get  the  money  he  needs, 
at  the  times  and  in  the  exact  form  that  he  needs  it,  provided 
his  banker  will  discount  his  notes.  The  only  limit  to  the 
increase  of  bank  currency,  therefore,  is  the  capacity  of 
banks  to  discount  mercantile  securities,  and  within  that 
limit  its  increase  is  in  direct  response  to  business  needs. 

Besides  the  capacity  to  increase  at  the  right  time  and 
place,  an  elastic  currency  must  possess  the  capacity  to 
decrease  when  the  need  for  it  has  passed  away.  This 
quality  also  bank  money  possesses  in  a  high  degree.  Credit 
balances,  which  by  means  of  checks  are  made  to  serve  the 
purposes  of  a  medium  of  exchange,  diminish  in  magnitude 
when  discounted  notes  fall  due  and  are  not  renewed,  cus- 
tomers meeting  their  obligations  to  the  bank  by  checking 


114  Money  and  Banking 

against  their  accounts  or  by  transferring  to  it  the  owner- 
ship of  cash  which  has  been  left  on  deposit  elsewhere.  Sup- 
pose, for  example,  that  a  merchant  has  for  three  months 
been  using  a  credit  balance  obtained  by  the  discount  of  his 
own  notes.  The  date  of  their  maturity  having  arrived,  he 
must  pay  them.  In  case  he  no  longer  needs  the  use  of  the 
bank's  credit,  he  will  do  this  by  drawing  a  check  against 
his  account  in  favor  of  the  bank,  having  previously  made 
preparation  for  this  by  allowing  a  sufficiently  large  balance 
to  accumulate.  In  case,  however,  he  still  needs  more 
money  than  he  possesses,  he  will  probably  meet  the  matured 
note  by  discounting  a  new  one  or  by  securing  the  renewal 
of  the  old  one.  It  would,  of  course,  be  possible  for  him  to 
accumulate  cash  in  his  own  tills  to  an  amount  sufficient  to 
pay  his  notes,  but  in  that  case  the  money  would  probably 
have  been  taken  from  banks  by  checks  drawn  against  the 
accounts  of  his  customers.  The  almost  universal  custom  of 
depositing  each  day  the  money  received,  however,  prevents 
the  general  adoption  of  this  method  of  payment.  It  is  thus 
evident  that  a  decrease  in  the  need  for  money  in  any  com- 
munity will  result  in  the  decrease  of  customers'  balances 
by  the  payment  of  matured  discounts,  no  business  man 
being  willing  to  continue  the  payment  of  interest  to  a  bank 
for  the  use  of  funds  which  he  no  longer  needs. 

The  process  by  which  bank-notes  are  withdrawn  from 
circulation,  when  they  are  no  longer  needed,  is  similar  to 
the  one  just  indicated.  Like  other  forms  of  money,  they 
are  deposited  in  the  banks,  and  cannot  again  be  circulated 
until  some  one  of  the  bank's  customers  is  willing  to  take 
them  in  satisfaction  of  the  whole  or  a  part  of  his  credit 
balance,  or  as  a  loan  against  a  discounted  note.  In  the 
former  case  they  are  substituted  for  another  form  of 
bank  money,  and  in  the  latter  they  constitute  a  real  addition 
to  the  currency.     When,  therefore,  they  are  transferred  to 


Bank  Currency  115 

the  bank  in  final  payment  of  discounted  notes,  they  effect 
as  real  a  diminution  of  the  volume  of  the  currency  as  the 
final  extinguishment  of  an  equivalent  amount  of  credit 
balances,  and  when  they  accumulate  in  the  tills  of  the  banks 
they  are  ultimately  redeemed  and  destroyed. 

REFERENCES 

Most  of  the  topics  discussed  in  this  and  the  following  chapters  on 
banking  are  treated  in  the  following  standard  works:  Bagehot,  Lombard 
Street;  Macleod,  Theory  and  Practice  of  Banking;  Gilbart,  History 
and  Principles  of  Banking;  Hankey,  Principles  of  Banking;  Dunbar, 
History  and  Theory  of  Banking;  Wagner,  Beitrdge  zur  Lehre  von  den 
Banken,  and  Der  Kredit  und  das  Bankwesen;  Scharling,  Bankpolitik ; 
Courcelle-Seneuil,  Traits  Theoretique  et  Pratique  des  Operations 
de  Banque;  and  Wolowski,  La  Question  des  Banqiies. 

The  following  more  recent  books,  some  of  them  widely  used  as  texts, 
should  also  be  consulted:  White,  Money  and  Banking;  Fiske,  The 
Modern  Bank;  Conant,  Principles  of  Money  and  Banking;  Bolles, 
Money  and  Banking,  and  Finance;  Sayous,  Les  Banques  de  Depot, 
les  Banques  de  Credit  et  les  Societes  Financieres;  and  Obst,  Geld- 
Bank-,  und  Borsenwesen. 

On  the  origin  and  development  of  banking  institutions  see  especially 
Macleod,  v.  i,  ch.  iv.  sec.  i ;  Bagehot,  ch.  iii ;  Gilbart,  v.  i.  chs.  i  and  ii ; 
Conant,  Principles,  bk.  v,  chs.  i  and  ii ;  and  Jager,  Die  altcste  Banken 
und  der  Ursprung  des  Wechsels..  On  the  details  of  the  various  banking 
operations  see  Fiske  and  Bolles  for  the  United  States ;  Sayous  for 
France;  Macleod  v.  i,  chs.  vi.  and  vii,  and  v.  ii,  ch.  xvii,  sees.  12-19; 
and  Gilbart,  v.  i,  chs.  xv  and  xx,  for  England;  Buchwald,  Die  Technik 
des  Bankbetriebes  and  Wagner,  Lehre,  chs.  ii  and  iii,  and  his  Kredit, 
ch.  ii,  for  Germany.  See  also  Scharling,  ch.  i,  sec.  i,  and  ch.  ii  sec.  2; 
and  Courcelle-Seneuil  bks.  11  and  iii. 


CHAPTER  VIII 
CLEARINGS  AND  THE  EXCHANGES 

One  of  the  chief  functions  of  modern  commercial  banks 
in  the  conduct  of  exchanges  is  the  making  of  payments  be- 
.tween  persons  residing  in  the  same  or  in  different  towns. 
This  branch  of  their  business  requires  a  more  detailed  de- 
scription than  could  be  presented  in  the  preceding  chapter. 
In  this  connection  the  word  exchange  has  acquired  a  tech- 
nical meaning,  being  applied  to  documents  like  checks, 
drafts  and  bills  of  exchange  which  are  used  for  the  mak- 
ing of  payments  between  different  places.  Business  men 
thus  speak  of  the  purchase  and  sale  of  exchange,  meaning 
thereby  the  negotiation  of  such  credit  instruments  as  are 
required  in  the  making  of  the  necessary  transfers  of  cash 
or  credit. 

I.  Local  Exchanges. — Exchanges  between  persons  resid- 
ing in  the  same  place,  or  local  exchanges,  as  we  may  call 
them  are  for  the  most  part  conducted  by  local  banks.  The 
hand-to-hand  money  used  is  deposited  in  these  institutions 
from  time  to  time  to  be  drav/n  out  as  needed,-  and  other 
payments  are  made  through  checks  against  customers'  bal- 
ances. Checks,  drafts  and  other  credit  instruments  received 
from  outside  are  either  directly  deposited  to  the  credit  of 
customers  or  discounted  and  the  proceeds  credited. 

Checks,  drafts,  bills  of  exchange,  and  similar  Instru- 
ments received  by  one  bank  and  drawn  upon  others  must 
be  collected.  In  the  case  of  those  drawn  upon  local  in- 
stitutions in  small  places  this  is  done  by  the  direct  presen- 
tation of  the  paper  to  the  bank  on  which  it  is  drawn  and 

ii6 


Clearings  and  the  Exchanges  117 

the  receipt  of  the  amount  due  in  current  funds.  In  larger 
places,  especially  in  big  cities,  this  method  of  procedure 
being  dangerous  and  expensive,  an  institution  called  the 
clearing-house  has  been  devised  to  take  its  place.  The  es- 
sential feature  of  this  is  a  room  conveniently  situated,  in 
which  certain  bank  clerks  meet  every  day  at  a  specified 
hour.  This  room  is  usually  furnished  with  desks,  one  for 
each  bank,  arranged  in  a  semicircular  or  circular  form.  At 
a  specified  time  the  clerks  deposit  the  checks  belonging  to 
each  bank  at  the  proper  desks,  and  receive  those  drawn 
against  the  institutions  they  represent.  The  clerk  at  each 
desk  then  prepares  a  balance-sheet  by  entering  in  debit  and 
credit  columns  respectively  the  aggregate  of  the  checks, 
drafts  and  bills  of  exchange  which  his  bank  holds  against 
each  of  the  others  and  the  amount  which  it  owes  to  each. 
By  footing  up  these  aggregates  he  is  able  to  determine  the 
total  amount  due  by  or  to  his  bank,  as  the  case  may  be. 
These  balance-sheets  are  then  sent  up  to  the  central  desk, 
presided  over  by  the  master  of  the  clearing-house,  and  ac- 
counts between  the  various  banks  are  there  settled,  it  being 
necessary  simply  for  those  from  whom  payments  are  due 
to  pay  the  amount  in  one  form  or  another  to  the  master 
of  the  clearing-house,  and  for  those  to  whom  sums  are  due 
to  receive  the  amounts  from  him. 

The  balances  are  paid  now  in  one  way  and  now  in  an- 
other. In  some  clearing-houses  banks  are  required  to  pay 
in  cash ;  in  others  they  are  permitted  to  carry  accounts  with 
the  clearing-house;  and  in  still  others  the  balances  are  paid 
in  drafts  on  some  large  institution  which  has  extensive  con- 
nections with  all  the  banks  in  question,  and  which  sometimes 
is  the  manager  of  the  clearing  system. 

2.  Out-of-town  Exchanges. — Banks  are  also  the  chief 
agencies  for  the  conduct  of  exchanges  between  persons  who 
do  not  reside  in  the  same  place.     If  a  person  buys  goods 


ii8  Money  and  Banking 

beyond  the  limits  of  his  home  town  he  often  pays  for 
them  by  sending  a  draft  purchased  from  a  local  bank  and 
drawn  either  upon  a  bank  in  the  place  in  which  the  goods 
were  purchased  or  upon  a  bank  in  some  other  place  which 
has  frequent  business  relations  with  this  one.  In  order  to 
render  this  service  to  their  customers  banks  are  obliged  to 
keep  funds  on  deposit  in  other  cities,  not  necessarily  in 
every  city  in  which  the  customers  may  desire  to  do  business, 
but  in  certain  commercial  centers  through  the  banks  of 
which  arrangements  may  be  made  for  the  conduct  of  ex- 
changes with  any  place  desired.  The  banks  selected  for  this 
purpose  in  this  country  are  usually  called  correspondents. 
In  countries  in  which  branch  banking  is  practiced  a  great 
deal  of  business  of  this  kind  is  conducted  between  the  cen- 
tral institution  and  its  various  branches. 

By  way  of  illustration  let  us  consider  the  way  in  which  a 
small  city  in  Wisconsin  conducts  its  exchanges  with  the 
outside  world.  We  may  assume  that  its  banks  have  corre- 
spondents in  Milwaukee,  Chicago,  and  New  York.  Its  out- 
of-town  business  results  from  the  purchase  and  sale  of 
goods  and  the  adjustment  of  credit  relations  between  its 
inhabitants  and  outsiders.  Purchasers  of  outside  goods 
will  pay  for  them  by  sending  checks  on  a  local  banker,  by 
buying  drafts  on  Milwaukee,  Chicago  or  New  York,  pro- 
vided exchange  on  these  places  is  acceptable  to  their  cus- 
tomers, or,  if  not  acceptable,  on  other  places,  such  drafts 
being  furnished  by  the  correspondents  of  the  local  bank. 
These  payments  do  not  necessarily  correspond  in  time  with 
the  purchases.  Some  are  deferred.  On  a  particular  date 
the  demand  for  exchange  due  to  purchases  comes  from  those 
made  on  time  in  the  past,  the  payment  for  which  falls  due  on 
that  date  and  from  those  made  on  a  cash  basis.  To  this 
demand  must  be  added  that  arising  from  the  adjustment 
of  credit  relations  with  outsiders.     Under  this  head  belong 


Clearings  and  the  Exchanges  119 

loans  made  to  outsiders  and  investments  in  outside  enter- 
prises. Gifts  to  outsiders  or  transfers  of  property  from 
any  cause  would  also  add  to  this  demand. 

To  meet  these  drafts  the  banks  have  the  checks,  drafts, 
bills  of  exchange,  etc.,  drawn  on  outside  institutions  and 
sent  to  the  city  in  payment  for  goods  sold,  on  account  of 
loans,  gifts,  and  other  transfers  of  property  to  citizens,  and 
on  account  of  investments  of  outsiders  in  local  enterprises. 
These  credit  instruments  are  deposited  with  the  local  banks 
and  sent  by  them  to  their  correspondents  for  collection. 
Whether  or  not  they  will  be  sent  to  Milwaukee,  Chicago,  or 
New  York,  or  distributed  between  the  three  places  will  de- 
pend in  part  upon  the  location  of  the  banks  on  which  these 
instruments  are  drawn  or  at  which  they  are  payable  and  in 
part  upon  the  condition  of  the  local  banks'  accounts  with 
their  correspondents.  Instruments  drawn  on  Milwaukee 
or  on  banks  in  towns  which  do  their  banking  business  chiefly 
through  Milwaukee  will  usually  be  sent  to  correspondents 
in  that  city,  and  the  others,  on  the  same  principle,  to  Chi- 
cago and  New  York  correspondents.  Certain  checks  and 
drafts  may  be  indifferently  sent  to  either  place,  in  which 
case  the  condition  of  the  banks'  balances  in  these  three  cen- 
ters will  determine  the  distribution. 

In  the  United  States  New  York  exchange  is  in  the  great- 
est demand  because  this  city  is  the  commercial  and  finan- 
cial center  of  the  country.  It  has  commerce  with  nearly, 
if  not  quite,  every  city  in  the  United  States  and  with  the 
most  important  places  in  foreign  countries,  and  more  in- 
vestments are  made  through  its  agency  than  through  that 
of  any  other  place.  Every  town  is,  therefore,  able  to  use 
New  York  exchange  and  on  this  account  people  are  more 
apt  to  call  for  payment  in  that  medium  than  in  any  other. 
In  the  middle  west  Chicago  exchange  has  wide  currency 
and  in  the  southern  Mississippi  valley  and  the  Southwest 


120  Money  and  Banking 

St.  Louis  exchange.  On  the  Pacific  Coast  San  Francisco 
exchange  is  widely  used.  The  selection  of  the  location  of 
a  bank's  correspondents  is  determined  by  these  facts.  It 
must  supply  the  demand  of  its  customers  and  must  there- 
fore be  able  to  sell  exchange  on  some  or  all  of  these  centers, 
3.  Bankers'  balances. — It  is  obvious  that  on  a  given  date 
the  balance  between  the  drafts  made  by  the  banks  of  a 
town  on  their  correspondents  and  the  credits  made  in  their 
favor  through  collections  and  deposits  of  checks  and 
drafts  may  be  in  their  favor  or  against  them.  In  the 
former  case  their  balances  with  their  correspondents  will 
increase  and  in  the  latter  case  decrease.  A  succession  of 
favorable  balances  might  result  in  large  accumulations  and 
a  succession  of  unfavorable  balances  in  the  overdrawing 
of  their  accounts.  The  existence  of  such  balances  render 
possible  the  movement  of  money  from  one  place  to  another, 
since  the  creditor  banks  may  demand  from  the  debtor  banks 
payment  in  cash.  Whether  or  not  they  will  do  so  depends 
upon  their  ability  profitably  to  use  at  home  more  cash  than 
they  already  have,  and  this  depends  upon  the  relative  local 
and  outside  demand  for  loans  and  hand-to-hand  money. 
When  banks  are  loaning  heavily  to  local  customers  their 
deposits  increase  and  more  cash  is  needed  in  the  reserves, 
and,  when  there  is  an  increased  demand  for  hand-to-hand 
money,  a  relatively  larger  number  of  checks  are  presented 
for  encashment  and  they  are  obliged  to  increase  the  per- 
centage of  reserves  to  deposits,  unless  they  are  able  to  meet 
this  demand  by  increased  issues  of  notes,  a  resource  not 
open  to  the  banks  of  the  United  States  under  existing  con- 
ditions. If  the  home  demand  for  loans  and  for  hand-to- 
hand  money  does  not  justify  the  banks  in  calling  for  ship- 
ments of  currency  from  their  correspondents,  they  may 
loan  surplus  funds  in  the  cities  in  which  their  correspon- 
dents are  located,  or  in  other  cities,  or  leave  them  on  de- 


Clearings  and  the  Exchanges  121 

posit  with  correspondents  at  such  a  rate  of  interest  as  may- 
be agreed  upon.  In  this  case  these  funds  will  be  loaned  by 
the  correspondents  instead  of  by  the  local  banks,  and  the 
rate  of  interest  paid  by  them  will  be  sufficiently  below  the 
local  rate  to  guarantee  a  fair  profit  on  the  transaction.  In 
case  the  home  demand  for  loans  or  cash  or  both  exceeds  the 
funds  banks  have  at  hand,  or  on  deposit  with  their  corre- 
spondents, they  may  arrange  with  the  latter  for  overdraw- 
ing their  accounts,  either  by  drawing  drafts  upon  them 
without  sending  exchange  or  cash  sufficient  to  pay  them, 
or  by  ordering  shipments  of  currency  to  them  in  case  the 
need  is  for  hand-to-hand  money  rather  than  credit.  Cor- 
respondents will  grant  such  accommodations  only  on  condi- 
tion of  the  payment  of  a  rate  of  interest  on  adverse  balances 
equal  to  or  in  excess  of  the  local  rate  plus  the  expenses  of 
the  transaction. 

4.  The  balance  of  indebtedness  between  communities. — 
From  the  above  description  it  is  obvious  that  the  procedure 
of  banks  in  the  matter  of  receipts  of  money  from  and  ship- 
ments of  money  to  out-of-town  institutions  depends  upon 
the  relative  demands  of  their  community  and  those  with 
which  they  are  commercially  connected  for  loans  and  hand- 
to-hand  money.  The  tendency  is  for  the  loan  funds  in  the 
possession  of  banks  to  be  so  distributed  that  there  will  be 
no  profit  in  shipments  of  money  or  transfers  of  credit  from 
one  place  to  another.  Such  an  equilibrium,  however,  is 
seldom  established,  and  if  it  exists  is  certain  to  be  speedily 
disturbed  by  fluctuations  in  commercial,  credit,  and  gift  rela- 
tions over  which  the  banks  have  little  or  no  control.  The 
fundamental  causes  of  currency  movements  must,  there- 
fore, be  sought  in  such  fluctuations. 

Commercial  relations  between  communities  are  revealed 
most  clearly  by  what  is  called  the  balance  of  trade,  by  which 
is  meant  the  difference  between  the  totals  of  the  sales  to 


122  Money  and  Banking 

and  the  purchases  from  outsiders.  When  the  total  of  sales 
exceeds  the  total  of  purchases,  the  balance  of  trade  is  said 
to  be  favorable,  and  in  the  opposite  case  unfavorable. 
Credit  relations  are  revealed  by  balancing  mutual  loans  and 
investments,  and  gift  relations  by  balancing  gifts  and  other 
transfers  of  property  for  which  no  return  is  expected.  A 
combination  of  these  balances  results  in  making  a  given 
community  either  a  debtor  of  or  a  creditor  to  other  com- 
munities. It  is  for  the  adjustment  of  these  debit  and  credit 
balances  that  shipments  of  money  from  place  to  place  are 
made. 

At  this  point  the  queries  naturally  arise  whether  the 
money  funds  of  a  community  may  not  be  completely  ex- 
hausted by  the  payment  of  adverse  balances  and  how  much 
is  required  for  this  purpose.  An  examination  of  the  various 
elements  which  determine  the  balance  of  indebtedness  will 
show  that  there  is  no  danger  either  of  the  exhaustion  of 
money  funds  or  of  their  reduction  below  minimum  re- 
quirements. The  balance  of  trade,  the  balance  of  loans, 
and  the  balance  of  investments  are  all  three  adjustable. 
Long  before  a  community  could  be  deprived  of  the  mini- 
mum amount  of  cash  needed  for  bank  reserves  and  hand- 
to-hand  money,  prices,  interest  rates,  and  opportunities  for 
profitable  investments  would  have  so  changed  as  to  anni- 
hilate the  unfavorable  balance.  The  first  effect  of  ship- 
ments of  currency  to  other  centers  is  the  decline  in  the 
reserves  of  banks,  which,  if  continued,  will  result  in  a  rise 
of  interest  rates  and  a  contraction  of  bank  loans.  The 
withdrawal  from  business  men  of  the  loan  accommodations 
to  which  they  have  been  accustomed  will  force  them  to 
diminish  their  purchases  and  will  stimulate  their  efforts  to 
sell.  If  this  is  not  sufficient  to  redress  the  unfavorable 
balance,  loans  from  outsiders  may  be  increased  or  the  fall 
in  local  values  due  to  the  increased  anxiety  to  sell  property 


Clearings  and  the  Exchanges  123 

may  induce  outsiders  to  increase  their  investments  in  the 
town.  The  proper  adjustment  will  ultimately  be  brought 
about  by  a  change  of  prices.  If  those  of  the  place  at  which 
the  balance  of  indebtedness  is  adverse  are  sufficiently  re- 
duced, increased  sales  to  and  increased  investments  by  out- 
siders will  remedy  the  difficulty,  and  such  a  reduction  will 
result  from  the  pressure  to  meet  obligations  caused  by  the 
currency  drain. 

The  influence  of  currency  movements  on  relative  prices 
must  not  be  confused  with  the  fundamental  causes  of  price 
changes  discussed  in  Chapters  III  and  IV.  We  are  here 
concerned  with  the  adjustment  of  the  relations  between 
the  demand  and  the  supply  of  the  same  goods  in  different 
places.  In  those  chapters  we  discussed  the  relation  between 
the  demand  and  the  supply  of  gold  and  other  commodities. 
Movements  of  currency  from  place  to  place  are  but  one 
phase  of  the  operation  of  the  general  principle  that  people 
sell  in  the  dearest  and  buy  in  the  cheapest  market,  the  result 
of  which  is  a  tendency  toward  the  equalization  of  the  prices 
of  the  same  commodity  in  different  markets.  The  price 
problem  discussed  in  Chapters  III  and  IV  is  the  funda- 
mental one  which  remains  after  prices  as  between  different 
markets  have  been  adjusted  and  have  reached  a  state  of 
equilibrium. 

5.  The  rate  of  exchange. — Shipments  of  currency  from 
place  to  place  involve  expenditures  for  express  charges  and 
insurance  and  the  loss  of  interest  during  the  period  of 
transit.  This  latter  item  is  explained  by  the  fact  that  banks 
are  unable  to  count  as  part  of  their  reserve,  and  hence  to 
use  as  a  basis  for  loans,  money  in  the  possession  of  an 
express  company.  On  account  of  these  expenses,  a  bank 
which  is  asked  to  sell  exchange  on  a  place  in  which  it  has 
no  balance,  or  to  which  it  cannot  without  expense  trans- 
fer a  portion  of  its  balance  in  some  other  place,  must  charge 


124  Money  and  Banking 

a  premium  for  such  drafts,  unless  it  can  buy  in  the  home 
town  exchange  on  that  place  at  par.  Under  the  opposite 
circumstances  a  bank  may  be  willing  to  sell  drafts  at  a 
discount,  since  this  may  be  the  most  profitable  way  of  using 
a  surplus  balance  with  its  correspondent.  This  would  be 
the  case,  for  example,  if  its  reserve  were  low  and  its  sur- 
plus with  the  correspondent  large.  Rather  than  pay  the 
expense  of  a  currency  shipment,  it  could  afford  to  sell 
drafts  at  any  discount  less  than  that  expense.  The  maxi- 
mum premium  it  could  charge  in  the  opposite  case  would 
be  the  expense  of  sending  money  to  cover  its  draft,  since 
rather  than  pay  a  higher  premium  customers  would  ship 
cash  for  themselves.  The  rate  of  exchange  on  a  place,  as 
the  price  of  drafts  is  technically  called,  may,  therefore, 
fluctuate  between  a  point  above  par,  determined  by  adding 
the  expenses  of  shipment  to  the  face  value  of  the  draft, 
and  a  point  below  par  determined  by  subtracting  that 
amount.  The  actual  premium  or  discount  is  fixed  by  com- 
petition between  the  buying  and  selling  banks  of  a  place, 
those  in  a  position  to  sell  exchange  competing  with  each 
other  for  the  custom  of  those  buying,  in  case  exchange  is 
at  a  discount,  and,  in  case  it  is  at  a  premium,  the  buying 
banks  bidding  against  each  other  for  the  drafts  the  sell- 
ing banks  are  willing  to  dispose  of. 

The  cost  per  $1000  of  currency  shipments  between  New 
York  and  Chicago  is  usually  about  50  cents ;  between  New 
York  and  St.  Louis,  60  cents ;  between  New  York  and  New 
Orleans,  75  cents;  and  between  New  York  and  San  Fran- 
cisco $1.50  (Johnson,  p.  82,  note).  In  this  country  the  ex- 
pense of  currency  shipments  is  sometimes  saved  by  the 
operation  of  our  independent  treasury  system.  The  central 
government  has  sub-treasuries  in  which  its  funds  are  kept  in 
Philadelphia,  New  York,  Boston,  Baltimore,  Cincinnati. 
St.  Louis,  New  Orleans,  Chicago,  and  San  Francisco,  and 


Clearings  and  the  Exchanges  125 

when  it  has  occasion  to  make  transfers  for  its  own  pur- 
poses it  may  sell  drafts  on  certain  sub-treasuries  at  par, 
thus  saving  banks  the  expense  of  shipping  currency  on  their 
own  account. 

6.  Foreign  exchanges. — The  foreign  exchanges  are  man- 
aged in  essentially  the  same  manner  as  the  domestic.  There 
are  some  peculiarities,  however,  which  demand  special 
treatment.  One  of  these  is  due  to  the  fact  that  different 
nations  have  different  units,  and  sometimes  different  stand- 
ards of  value,  and  it  is,  therefore,  necessary  to  translate 
the  language  of  values  of  one  into  that  of  others.  In  the 
case  of  nations  with  the  same  standard  this  is  accomplished 
by  calculating  the  so-called  par  of  exchange,  that  is,  the 
exact  equivalence  of  the  unit  of  one  nation  in  terms  of  the 
other.  That  between  the  United  States  and  England,  for 
example,  is  $4.866565,  the  result  obtained  by  dividing  113.- 
0016,  the  number  of  grains  of  pure  gold  in  the  English 
pound  sterling,  by  23.22  the  number  of  grains  of  pure  gold 
in  our  dollar.  Our  par  of  exchange  with  France  is  19.294 
cents,  the  quotient  of  4.4802,  the  number  of  grains  of  pure 
gold  in  the  French  franc,  divided  by  23.22.  Our  par  of 
exchange  with  any  gold  standard  country  is  obtained  by 
dividing  the  weight  in  grains  of  its  unit  of  value  by  23.22. 

Between  countries  having  different  standards  of  value, 
for  example,  between  gold  and  silver  standard  countries, 
instead  of  the  par  of  exchange,  the  relative  market  values 
of  the  two  metals  serve  as  the  basis  of  commercial  trans- 
actions. In  exchanges  between  the  United  States  and 
China,  for  example,  the  value  of  the  amount  of  silver  con- 
tained in  the  tael,  the  Chinese  unit  estimated  in  our  dollars 
is  the  basis.  Until  recently  Mexican  exchange  was  based 
upon  the  price  on  our  markets  of  the  amount  of  silver  con- 
tained in  the  Mexican  silver  dollar.  If  a  nation  has  a  sec- 
ondary standard,  its  depreciation  must  be  calculated  in  ad- 


126  Money  and  Banking 

dition  to  the  par  of  exchange  or  the  relative  values  of  the 
primary  units,  as  the  case  may  be. 

The  rates  of  exchange  between  foreign  countries  are 
based  upon  the  par  of  exchange,  if  one  exists,  or  upon  what 
takes  its  place,  if  one  does  not  exist,  and  fluctuates  be- 
tween points  above  and  below  this  figure  determined  by- 
adding  or  subtracting  the  expense  of  shipping  the  forms  of 
currency  acceptable  in  the  country  in  question.  In  gold 
standard  countries  these  are  called  the  gold  points,  since 
they  are  the  rates  at  which  gold  is  likely  to  be  imported 
or  exported.  The  expense  of  shipping  gold  is  made  up  of 
the  same  items*  as  that  of  shipping  currency  between  cities 
situated  in  the  same  country,  that  is,  of  express  or  freight 
charges,  insurance  and  interest  during  that  period  of  transit. 
Between  New  York  and  London  these  items  ordinarily 
amount  to  about  two  cents  per  pound  sterling.  If,  there- 
fore, the  price  of  sterling  exchange,  as  exchange  on  Lon- 
don is  called,  rises  above  $4,886  in  New  York,  it  will  be 
profitable  for  bankers  to  sell  exchange  on  London  and  ship 
gold  as  cover,  and  if  it  falls  below  $4,846,  it  will  be  profit- 
able to  buy  exchange  on  London  and  import  gold.  In 
New  York,  consequently,  $4,886  is  called  the  gold  export 
point  on  London  and  $4,846  the  gold  import  point. 

At  important  commercial  centers  like  New  York,  Lon- 
don, Paris,  Berlin  and  Vienna  several  different  rates  are 
quoted  on  the  same  market  corresponding  to  the  different 
kinds  of  foreign  bills  offered  for  sale.  In  New  York,  for 
example,  rates  are  regularly  quoted  on  at  least  three  classes 

*  These  items  vary  in  amount  from  time  to  time.  Express  and 
freight  charges  and  insurance  are  tolerably  stable,  though  during  the 
last  quarter  of  the  19th  century  they  fell  considerably  between  New 
York  and  London  and  other  points  (Johnson,  p.  90,  note).  The  inter- 
est item  changes  more  frequently  on  account  of  the  fluctuation  of 
interest  rates  and  the  diminution  of  the  period  of  transit  caused  by 
increase  in  the  speed  of  steamships. 


Clearings  and  the  Exchanges  127 

of  bankers'  bills,  namely,  cables,  demand  and  sixty  days, 
and  on  several  classes  of  trade  bills.*  The  differences  be- 
tween these  quotations  are  chiefly  due  to  the  interest  item, 
which  is  larger  in  some  cases  than  in  others.  In  a  cable, 
for  example,  this  item  is  eliminated,  the  amount  of  the 
bill  being  placed  at  the  disposition  of  the  purchaser  in  a  few 
minutes'  time.  In  the  case  of  a  demand  bill  interest  must  be 
subtracted  for  the  period  intervening  between  the  sale  of 
the  bill  and  its  presentation  for  payment,  and  in  that  of  a 
sixty  day  bill  for  sixty  days.  In  the  negotiation  of  trade 
bills  the  rate  at  which  interest  is  reckoned  varies  with  dif- 
ferent classes  of  bills  on  account  of  variation  in  the  element 
of  risk,  which  is  greater  in  some  cases  than  in  others.  Gen- 
erally speaking,  the  rate  charged  on  trade  bills  is  higher  than 
on  bankers'  bills  and  that  charged  on  bills  drawn  on  unim- 
portant and  little  known  houses  higher  than  on  houses  of  ex- 
tensive international  reputation.  The  rate  on  sight  bills  is 
usually  taken  as  the  basis  for  reckoning  the  rate  on  all 
classes  of  time  bills,  the  interest  item  calculated  as  just  in- 
dictated  being  subtracted  from  the  sight  rate. 

On  account  of  the  importance  of  London  as  an  inter- 
national commercial  and  financial  center,  sterling  exchange 
is  the  most  important  medium  of  international  payments. 
It  is  to  the  world's  foreign  commerce  what  New  York  ex- 
change is  to  the  domestic  commerce  of  the  United  States. 
Banks  in  every  part  of  the  world  have  correspondents, 
agencies  or  branches  in  that  city,  and  in  consequence  ex- 
change on  any  part  of  the  world  may  be  more  easily  and 
cheaply  negotiated  there  than  elsewhere. 

The  actual  rates  of  exchange  between  any  two  countries 
are  determined  by  the  relation  between  the  demand  and 

*  The  student  should  examine  the  quotations  as  given  in  such 
periodicals  as  The  Wall  Street  Journal,  The  New  York  Journal  of 
Commerce,  The  Commercial  and  Financial  Chronicle,  and  Bradstreets. 


128  Money  and  Banking 

supply  of  foreign  bills,  and  this  by  the  trade  and  credit  rela- 
tions of  the  two  countries.  In  New  York,  for  example, 
bills  on  London  are  constantly  being  drawn  against  goods 
exported  and  on  account  of  foreign  investments  in  Ameri- 
can enterprises,  foreign  loans  to  us,  and  other  transactions 
which  make  Englishmen  and  other  foreigners  our  debtors, 
and  London  bills  are  constantly  in  demand  to  meet  our  in- 
debtedness to  foreigners  created  by  imports  of  foreign  mer- 
chandise, investments  in  foreign  enterprises,  loans  to  for- 
eigners and  other  transactions  which  call  for  payments 
from  New  York  to  Englishmen  and  other  foreigners  who 
transact  their  American  business  through  London,  If  the 
amount  of  London  bills  offered  exceeds  that  demanded, 
sterling  exchange  will  be  below  par,  and  under  the  opposite 
conditions,  above  par,  the  actual  amount  below  or  above 
being  determined  by  the  competition  of  sellers  in  the  one 
case  and  of  buyers  in  the  other.  If  this  competition  forces 
the  rate  to  the  gold  points,  bankers  will  find  it  profitable  to 
ship  gold,  and  these  shipments  will  affect  bank  reserves, 
the  volume  of  loans,  rates  of  interest,  prices  and  invest- 
ments in  the  two  countries  in  the  manner  indicated  in  the 
preceding  section  in  which  the  influence  of  currency  move- 
ments between  cities  of  the  same  country  was  described. 

Some  of  the  items  entering  into  the  international  bal- 
ance of  indebtedness  cannot  be  statistically  measured,  and 
on  that  account  their  importance  is  sometimes  underesti- 
mated or  even  entirely  overlooked.  Since  all  ships  clearing 
from  American  ports  are  obliged  to  declare  their  cargoes 
and  all  goods  entering  the  country  to  pass  through  our 
custom  houses,  the  amounts  of  our  exports  and  imports  of 
merchandise,  gold  and  silver  are  registered  with  a  consid- 
erable degree  of  accuracy,  but  the  same  cannot  be  said  of  a 
long  list  of  other  items  which  figure  largely  in  our  inter- 
national balance,  such,  for  example,  as  purchases  and  sales 


Clearings  and  the  Exchanges  129 

of  stocks  and  bonds,  international  investments  in  other 
forms,  payments  and  receipts  of  interest  and  dividends, 
bankers'  balances,  ocean  freight  rates  paid  and  received, 
expenditures  of  tourists  and  immigrants,  expenses  for  em- 
bassies and  consulates,  purchases  of  public  property  from 
foreigners  and  sales  to  them,  and  some  other  items  of  less 
significance  and  frequency  of  occurrence.  These  items 
sometimes  reach  large  aggregates  and  profoundly  influence 
foreign  rates  of  exchange.  This  is  particularly  true  of 
international  transactions  in  stocks  and  bonds  and  of  fluc- 
tuations in  bankers'  balances. 

On  the  stock  exchanges  of  important  financial  centers, 
like  New  York,  London,  Paris  and  Berlin,  purchases  and 
sales  of  stocks  and  bonds  for  foreign  account  constitute  a 
regular  branch  of  business,  and,  by  the  use  of  the  cable,  so- 
called  arbitrage  houses  buy  in  one  market  and  sell  in  an- 
other whenever  a  difference  in  the  quotations  of  a  given 
security  on  the  two  markets  offers  opportunity  for  a  profit. 
When  New  York  stockbrokers  or  arbitrage  houses  sell 
securities  in  London  they  draw  bills  on  the  purchasers  and 
sell  them  on  the  market  in  precisely  the  same  manner  that 
an  exporter  of  wheat  or  cotton  draws  against  the  cargo  he 
ships  and  realizes  the  proceeds  of  his  sale  by  negotiating 
his  bills.  In  like  manner  purchases  of  securities  in  London 
create  a  demand  for  sterling  exchange  to  be  used  in  pay- 
ment. The  amounts  of  such  purchases  and  sales,  however, 
are  nowhere  accurately  recorded  and  their  influence  on 
the  rate  of  exchange  cannot  be  accurately  measured.  That 
it  is  frequently  great,  however,  sometimes  dominating  all 
other  influences,  cannot  be  doubted.  Such  international 
movements  of  securities  frequently  prevent  gold  shipments, 
the  high  interest  rates  which  usually  accompany  a  money 
stringency  lowering  stock  quotations  and  stimulating  sales 
on  foreign  exchanges. 


130  Money  and  Banking 

Bankers'  balances  with  foreign  correspondents  are  quick 
to  respond  to  international  financial  influences,  particular- 
ly to  differences  in  the  rate  of  interest  ruling  at  different 
centers.  For  example,  if  interest  rates  in  New  York  are 
considerably  above  those  in  London,  London  bankers  may 
order  their  New  York  correspondents  to  draw  upon  them 
and  to  invest  the  proceeds  in  New  York  paper.  Such  or- 
ders increase  the  supply  of  London  bills  on  the  New  York 
market.  If  London  rates  are  the  highest,  New  York 
bankers  may  bid  for  sterling  exchange  in  order  to  use  the 
proceeds  to  lend  in  London.  On  the  markets  of  continental 
Europe  such  influences  are  very  potent,  particularly  in  the 
determination  of  exchange  rates  on  London.  In  New  York 
they  are  very  important  at  times,  but  are  not  so  persistent 
and  regular  in  their  influence  as  they  are  in  such  cities  as 
Paris  or  Berlin. 

REFERENCES 

On  currency  movements  see  Laughlin,  ch.  x ;  Kinley,  chs.  vi  and  vii ; 
Taylor,  ch.  iv;  and  Conant,  Principles,  bk.  11,  ch.  vi. 

On  the  domestic  and  foreign  exchanges  see  Johnson,  ch.  v;  Clare, 
The  A  B  C  of  the  Foreign  Exchanges,  and  A  Money  Market  Printer 
and  Key  to  the  Foreign  Exchanges ;  Goschen,  The  Theory  of  the  For- 
eign Exchanges ;  Macleod,  The  Elements  of  Banking,  ch.  vii,  and  The 
Theory  and  Practice  of  Banking,  ch.  vi ;  Margraff,  International  Ex- 
changes; Le  Touze,  Traitc  du  Change;  Pallain,  Les  Changes  Etrangers 
et  les  Prix;  Hertzka,  Wechselkurs  und  Agio;  Schraut,  Die  Lehre  von 
den  ausw'drtigen  Wechselkursen;  Obst,  Wechsel-  und  Scheckkunde 
and  Organisation  des  Zahlungsverkehrs ;  and  Lexis,  Die  Fixierung  des 
Wechselkurses  in  den  Silberw'dhrungsl'dndern ;  and  Nachod,  Die  Or- 
ganisation des  Reisekredits,  Kreditbrief,  Circularkreditbrief  und  Rei- 
sescheck,  in  Conrad's  Jahrbuch,  3d  F.,  v.  81,  p.  289,  and  v.  82,  p.  823, 
respectively. 

The  clearing  systems  of  the  most  important  countries  are  treated  in 
the  following  books:  Cannon,  Clearing-Houses;  Howarth,  Our  Clear- 
ing System;  Seyd,  London  Bank  and  Bankers'  Clearing-House  Sys- 
tem; Easton,  The  Work  of  a  Bank,  ch.  vii;  Bolles,  Practical  Banking, 
pt.  Ill;  and  Rauchberg,  Clearing-und  Giro-Verkehr. 


CHAPTER  IX 
THE  REGULATION  OF  COMMERCIAL  BANKING 

Commercial  banking  plays  so  important  a  role  in  the 
economy  of  modern  nations  that  its  regulation  with  a  view 
especially  to  the  safe-guarding  of  the  interests  of  the  public, 
is  a  matter  of  prime  importance.  The  methods  at  present 
employed  in  the  different  countries  will  be  described  in  some 
detail  in  succeeding  chapters.  In  this  one  certain  principles 
which  have  been  revealed  by  experience  everywhere  will  be 
discussed. 

I.  Incorporation. — It  is  generally  admitted  now-a-days 
that  no  one  ought  to  be  permitted  to  engage  in  the  banking 
business  without  special  authority  from  the  state.  The 
reason  for  this  is  the  need,  in  the  interests  of  safety,  of  the 
public  regulation  and  supervision  of  this  business.  Experi- 
ence has  shown  that  this  can  best  be  secured  by  the  require- 
ment of  incorporation  through  special  charter  or  in  accord- 
ance with  general  laws,  such  charters  or  laws  prescribing 
the  conditions  under  which  the  business  must  be  carried 
on.  Without  incorporation  it  is  difficult,  if  not  impossible, 
to  separate  banking  from  other  lines  of  business,  and  con- 
sequently to  know  precisely  who  are  engaged  in  it  and  how 
it  is  being  conducted.  Under  such  conditions  certain  per- 
sons are  sure  to  escape  the  regulations  prescribed  by  law  and 
designed  for  the  safe-guarding  of  the  public. 

As  between  incorporation  by  special  charter  or  under 
general  laws  practice  in  the  past  has  varied  widely,  but 
general  banking  laws  are  fast  becoming  the  rule  the  world 

131 


132  Money  and  Banking 

over.  They  prevent  favoritism  and  secure  uniformity. 
Only  in  the  cases  of  highly  specialized  institutions  of  pecul- 
iar character,  like  the  great  central  banks  of  Europe,  is  the 
special  charter  method  of  incorporation  likely  to  survive. 
The  differentiation  of  the  banking  from  the  general  in- 
corporation laws  of  a  state,  that  is,  those  applicable  to  other 
kinds  of  industrial  corporations,  is  also  desirable  on  account 
of  the  peculiarities  and  public  importance  of  this  business. 
Such  differentation  is  rapidly  becoming  the  rule  in  this 
country. 

2.  Capital  and  surplus.— One  of  the  most  common  re- 
quirements imposed  by  banking  laws  in  this  and  other 
countries  is  the  accumulation  of  a  minimum  amount  of 
capital  and  surplus.  By  the  former  is  meant  a  fund  con- 
tributed directly  or  guaranteed  by  the  stockholders  or  pro- 
prietors, and  by  the  latter  an  additional  fund  accumulated 
from  profits.  Such  funds  are  primarily  desirable  for  the 
purpose  of  safe-guarding  the  interests  of  customers.  They 
represent  the  stake  of  the  proprietors  in  the  business  and 
the  possibility  of  their  loss  contributes  toward  conserva- 
tism of  management.  In  case  of  failure,  such  funds  are 
available  for  the  payment  of  depositors  and  noteholders  and 
other  creditors,  who  are  to  this  extent  guaranteed  against 
loss.  Surplus  funds  may  also  be  accumulated  as  a  means  of 
meeting  temporarily  losses  without  infringing  upon  the 
other  resources  of  the  bank,  and  for  the  equalization  of 
dividends. 

The  laws  of  most  nations  now  require  a  certain  paid-up 
capital  as  a  condition  preliminary  to  the  starting  of  a  com- 
mercial banking  business  and  the  accumulation  of  a  surplus 
fund  equal  to  a  certain  percentage  of  the  capital  from  the 
profits  earned  from  year  to  year.  Our  national  banking 
act,  for  example,  requires  a  minimum  capital  of  $25,000 
of  national  banks  in  towns  the  population  of  which  does  not 


The  Regulation  of  Commercial  Banking    133 

exceed  three  thousand  inhabitants,  of  $50,000  of  those  in 
towns  whose  population  is  between  three  and  six  thousand, 
of  $100,000  of  those  in  towns  whose  population  is  be- 
tween six  and  fifty  thousand,  and  of  $200,000  of  those 
in  towns  whose  population  exceeds  fifty  thousand.  In 
most  of  the  states  of  the  Union  banks  with  less  than  $25,- 
000  capital  are  permitted  in  small  towns,  but  most  of  them 
prescribe  a  certain  minimum  as  a  necessary  condition  of 
engaging  in  the  banking  business. 

Regarding  the  surplus  fund  the  requirement  of  the  na- 
tional banking  act  is  that  before  the  declaration  of  a  divi- 
dend each  association  shall  carry  one-tenth  of  its  net  profits 
of  the  preceding  half-year  to  its  surplus  fund,  until  the  same 
shall  amount  to  20  per  cent,  of  its  capital  stock.  Similar 
provisions  have  been  incorporated  in  the  banking  laws  of  the 
various  states. 

The  efficiency  of  these  funds  as  a  means  of  reimbursing 
bank  creditors  in  cases  of  failure  depends  upon  their  pro- 
portion to  the  total  volume  of  such  obligations,  and  upon 
the  form  and  safety  of  their  investment.  The  regula- 
tion of  this  proportion  is  usually  left  to  the  discretion  of 
the  banks  themselves,  the  chief  exception  being  the  re- 
quirement made  by  our  national  banking  act,  the  Canadian 
banking  act,  and  some  others,  that  the  total  volume  of 
notes  issued  shall  not  exceed  the  capital  stock.  Inasmuch  as 
the  chief  obligation  of  most  commercial  banks  at  the  present 
day  is  to  depositors,  and  in  case  of  failure  the  greatest 
losses  fall  on  them,  it  may  be  questioned  whether  some 
proportion  between  the  total  deposits  permissible  and  the 
capital  and  surplus  funds  ought  not  to  be  fixed  by  law.  In 
practice  this  proportion  varies  widely.  In  fact,  bank  of- 
ficials usually  expand  their  deposits  to  the  greatest  extent 
possible,  consistent  in  their  opinion  with  safety,  regardless 
of  the  amount  of  the  bank's  capital  and  surplus.     It  must 


134  Money  and  Banking 

be  admitted  that  the  safety  of  the  depositor  does  not  depend 
primarily  upon  the  size  of  these  funds,  but  this  is  no  reason 
why  they  should  not  be  made  to  contribute  toward  such 
safety  to  a  greater  extent  than  they  now  do. 

In  the  investment  of  these  funds  security  is  the  prime 
consideration,  though  their  speedy  transformation  into  cash 
when  occasion  demands  is  also  important.  The  investment 
of  these  funds  is  usually  subject  for  the  most  part  to  the 
same  regulations  as  the  other  investments  of  the  bank.  The 
chief  exception  in  this  country  is  the  requirement  of  our 
national  banking  act  that  a  certain  portion  of  the  capital 
must  be  invested  in  government  bonds,  one- fourth  in  the 
case  of  banks  with  a  capitalization  of  $150,000  or  less,  and 
not  less  than  $50,000  in  the  cases  of  larger  banks.  The 
practice  of  investing  the  whole  or  a  considerable  part  of 
the  capital  and  surplus  in  high  class  bonds  is  widespread, 
though  rarely  required  by  law. 

3.  Double  liability  of  stockholders. — Another  means  of 
safeguarding  the  interests  of  bank  creditors  is  the  require- 
ment, found  in  our  national  banking  act  and  in  the  banking 
laws  of  many  of  our  states,  that,  in  case  of  failure  with 
inadequate  assets  to  meet  all  liabilities,  stockholders  may  be 
assessed  to  an  amount  equal  to  their  holdings  of  capital 
stock.  In  the  case  of  other  industrial  corporations  the  rule 
is  that  the  liability  of  stockholders  is  limited  to  the  amount 
of  their  subscriptions.  The  exception  to  this  principle  in  the 
case  of  banks  is  justified  by  the  public  character  of  their 
business  and  by  the  importance  of  public  confidence  in 
them.  Losses  on  account  of  failure  seriously  shatter  such 
confidence  and  tend  to  undermine  the  entire  business,  a  re- 
sult even  more  disastrous  to  the  public  than  to  the  bankers 
themselves. 

4.  Regulation  of  investments. — In  the  selection  of  its 
loans,  discounts  and  other  securities,   besides   safety,   the 


The  Regulation  of  Commercial  Banking    135 

dates  of  maturity,  and  ready  saleability  are  prime  considera- 
tions with  a  commercial  bank.  In  order  to  meet  its  daily 
obligations,  it  must  be  able  to  command  cash  or  funds  in 
the  form  of  checks  or  drafts  on  other  institutions.  The 
latter  are  available  for  building  up  credit  balances  with  cor- 
respondents, and  the  former  may  be  used  for  this  purpose 
and  also  as  a  reserve.  Occasionally  also  a  bank  must  be 
able  to  command  extraordinary  amounts  on  short  notice. 

These  funds  come  to  the  bank  from  three  main  sources, 
namely,  the  daily  deposits  of  its  customers,  the  payment  of 
their  maturing  notes,  and  the  sale  of  securities  upon  the 
open  market  or  to  some  special  institution,  such  as,  in 
Europe,  the  great  central  banks.  Of  these  three  resources, 
the  second  should  be  chiefly  relied  upon.  It  is  the  only 
one  completely  under  the  bank's  control.  When  a  note  or 
bill  falls  due  the  bank  has  a  legal  right  to  demand  its  pay- 
ment in  current  funds,  and  it  is  also  free  at  such  a  time  to 
grant  or  to  refuse  a  new  loan.  The  amount  of  the-  daily 
deposits  depends  upon  business  conditions  and  the  will  of 
customers,  and  is  therefore  uncertain,  as  is  also  the  ability 
of  the  bank  to  rediscount  with  another  institution  or  to  sell 
securities  on  the  open  market. 

It  is,  therefore,  a  matter  of  prmie  importance  to  a 
commercial  bank  that  it  should  carry  a  large  portfolio  of 
notes  and  bills  so  arranged  as  to  maturity  that  it  is  able 
each  day  to  command  such  funds  as  it  needs  with  a  large 
margin  for  contingencies,  and  rapidly  to  change  the  direc- 
tion and  the  amount  of  its  investments  as  circumstances 
dictate.  Of  these  notes  and  bills  those  are  greatly  to  be 
preferred  which  originate  in  the  regular  processes  of  every- 
day commerce,  since  the  payment  of  these  follows  the  com- 
pletion of  these  processes.  Those  which  represent  per- 
manent investments,  or  fixed  rather  than  circulating  capital, 
on  the  other  hand,  depend   for  their  payment  on  profits 


136  Money  and  Banking 

which  are  contingent  on  the  successful  management  of  an 
entire  business  and  are  therefore  uncertain.  Notes  and 
bills  based  on  certain  forms  of  commerce,  even  though 
regular,  such  as  speculation  on  stock  and  produce  ex- 
changes, are  also  objectionable,  except  when  protected  by 
wide  margins  and  held  in  comparatively  small  quantities. 
The  element  of  risk  in  these  forms  of  commerce  is 
very  great  and  they  are  liable  to  sudden  interruptions  and 
fluctuations,  which  render  the  payment  at  maturity  of  the 
paper  based  upon  them  much  more  uncertain  than  that  of 
paper  based  upon  the  more  stable  forms. 

It  is  impossible  to  lay  down  any  fixed  rule  regarding  the 
proportion  of  a  bank's  total  investments  that  should  take 
the  form  of  bills  and  notes  of  the  kind  above  indicated. 
A  safe  one  to  follow,  however,  is  that  these  together  with 
the  holdings  of  cash  and  cash  items  should  at  least  equal 
the  total  deposits.  The  investment  of  the  capital  and  sur- 
plus may  safely  take  the  form  of  high  class  bonds,  since 
these  funds  exist  for  the  ultimate  protection  of  customers 
and  for  contingencies  of  rare  rather  than  of  everyday  oc- 
currence. Such  bonds  may  also  be  quickly  sold  for  cash 
at  times  when  good  policy  dictates  the  renewal  of  notes 
falling  due  or  the  extension  of  this  form  of  investment. 
As  a  main  reliance  for  banks,  however,  bonds  or  any 
form  of  security  representing  fixed  capital  are  impossible. 
The  main  function  of  commercial  banks  is  the  balancing 
of  debits  and  credits  which  arise  in  the  ordinary  everyday 
forms  of  commerce,  and  bills  and  notes  are  the  form  which 
these  debits  and  credits  assume.  Their  absorption  by  the 
banks  is,  therefore,  necessary.  Bonds  and  stocks,  on  the 
other  hand,  represent  savings  or  exchanges  one  part  of 
which  is  completed  only  after  the  lapse  of  years.  If  banks 
generally  opened  deposit  accounts  in  exchange  for  these, 
they  would  be  assuming  obligations  which  they  could  not 


The  Regulation  of  Commercial  Banking    137 

possibly  meet,  since  the  only  debits  which  would  normally 
come  from  these  investments  are  interest  and  dividend  pay- 
ments, and  these  accumulate  too  slowly  to  enable  a  bank 
to  meet  the  demands  of  its  depositors. 

The  regulation  of  bank  investments  by  law  is  a  difficult 
matter  and  only  possible  to  a  very  limited  extent.  The 
discretion  and  skill  of  bank  officers  must  be  chiefly  relied 
upon.  In  this  country  legislative  attempts  along  this  line 
have  taken  the  form  chiefly  of  defining  the  business  of 
banking  in  such  a  way  as  to  prohibit  dealings  in  ordinary 
merchandise,  of  limiting  real  estate  investments  and  loans 
on  real  estate  security,  and  of  requiring  the  investment  of 
a  certain  portion  of  the  capital  in  public  securities.  Our 
national  banking  act,  for  example,  describes  the  business 
permitted  to  national  banks  as  that  of  discounting  and 
negotiating  promissory  notes,  drafts,  bills  of  exchange, 
and  other  evidences  of  debt;  of  receiving  deposits;  of 
buying  and  selling  exchange,  coin  and  bullion;  of  loaning 
money  on  personal  security;  and  of  obtaining,  issuing  and 
circulating  notes.  (Sec  5136).  By  exclusion  this  section 
prohibits  dealings  in  ordinary  merchandise  and  loans  on  real 
estate  security.  Another  section  (5137)  permits  the  pur- 
chase, holding  and  conveying  of  real  estate  for  the  fol- 
lowing purposes  only:  "First,  such  as  shall  be  necessary 
for  its  immediate  accommodation  in  the  transaction  of  its 
business ;  second,  such  as  shall  be  mortgaged  to  it  in  good 
faith  by  way  of  security  for  debts  previously  contracted ; 
third,  such  as  shall  be  conveyed  to  it  in  satisfaction  of 
debts  previously  contracted  in  the  course  of  its  dealings; 
fourth,  such  as  it  shall  purchase  at  sales  under  judgments, 
decrees,  or  mortagages  held  by  the  association,  or  shall  pur- 
chase to  secure  debts  due  to  it. 

"But  no  such  association  shall  hold  the  possession  of  any 
real  estate  under  mortgage,  or  the  title  and  possession  of  any 


138  Money  and  Banking 

real  estate  purchased  to  secure  any  debts  due  to  it  for  a 
longer  period  than  five  years."     (Sec.  5137.) 

As  previously  noted,  the  act  also  requires  the  invest- 
ment of  a  portion  of  the  capital  of  national  banking  as- 
sociations in  government  bonds. 

A  further  restriction  is  imposed  in  Sec.  5200  by  the  pro- 
vision that  no  association  shall  loan  to  any  person,  firm  or 
corporation  an  amount  to  exceed  ten  per  cent,  of  its  unim- 
paired capital  and  surplus  and  in  no  case  to  exceed  30  per 
cent,  of  its  capital. 

The  above  provisions  regarding  real  estate  investments 
have  been  generally  incorporated  in  our  state  banking  acts, 
but  as  a  rule  these  acts  permit,  within  limits,  loans  on  real 
estate  security,  and  much  larger  loans  to  single  persons, 
firms  or  corporations,  and  do  not  require  investments  in 
government  or  any  other  bonds. 

In  the  laws  of  foreign  countries  different  provisions  may 
be  found.  In  Germany,  for  example,  banks  of  issue  are 
required  to  cover  the  circulating  notes  one-third  by  cash 
and  two-thirds  by  bills  of  exchange  maturing  in  not  more 
than  ninety  days  and  bearing  at  least  two  solvent  names. 
The  laws  regulating  the  Bank  of  France  prohibit  its  in- 
vestment in  bills  of  exchange  secured  by  less  than  three 
names  and  maturing  in  less  than  ninety  days  and  prescribes 
the  classes  of  other  securities  in  which  it  is  permitted  to  in- 
vest. The  banking  laws  of  Canada  are  carefully  drawn  in 
this  particular. 

5.  Regulation  of  reserves. — The  amount  of  cash  required 
by  a  bank  varies  from  time  to  time  and  the  needs  of  dif- 
ferent banks  at  the  same  time  are  not  the  same.  The  chief 
source  of  the  demand  upon  a  bank  for  this  form  of  currency 
is  the  need  of  customers  for  hand-to-hand  money,  and  this 
depends  in  part  upon  the  kinds  and  volume  of  the  trans- 
actions in  which  they  are  engaged,  and  in  part  upon  the 


The  Regulation  of  Commercial  Banking    139 

habits  of  the  community.  It,  therefore,  varies  with  the 
seasons  and  is  greater  at  times  when  certain  kinds  of 
payments,  like  those  for  dividends,  interest,  rents,  wages, 
etc.,  fall  due  than  at  others.  In  this  and  most  other 
countries  the  spring  and  fall  are  seasons  of  large  demand, 
the  former  because  agricultural  activities  are  then  starting, 
and  the  latter  on  account  of  the  movement  of  the  crops.  At 
the  beginnings  of  the  quarters,  especially  of  the  first  and 
the  third,  this  demand  is  also  great.  Interest  on  enormous 
issues  of  government  and  corporation  bonds  then  fall  due 
and  dividends  are  most  apt  to  be  paid  at  those  times.  In 
Scotland  half-yearly  payments,  such  as  rent,  interest  on 
loans  and  mortgages,  wages  of  farm  servants,  etc.,  cus- 
tomarily fall  due  in  May  and  November,  thus  causing  an 
unusual  demand  for  cash  at  those  times. 

The  extent  to  which  people  use  hand-to-hand  money  in- 
stead of  checks  is  also  partly  a  matter  of  habit  and  of  the 
enterprise  of  the  banks.  Until  considerably  after  the  first 
quarter  of  the  nineteenth  century  the  banks  of  England 
catered  chiefly  to  the  government  and  its  employees,  the 
nobility  and  the  great  merchants.  The  joint  stock  bank  of 
discount  which  appeared  in  the  thirties  gradually  changed 
this  custom,  however,  and  made  banks  popular  among 
all  classes,  thus  enormously  increasing  the  proportion  of 
bank  currency  to  cash  used  in  the  ordinary  transactions  of 
the  people.  In  this  country  banks  have  been  popular  almost 
from  the  beginning  of  their  history,  and  bank  currency,  at 
first  in  the  form  of  notes  and  later  in  the  form  of  deposits, 
has  constituted  the  larger  part  of  our  currency  for  nearly  a 
century.  With  the  multiplication  of  banking  institutions, 
however,  and  their  easier  accessibility  to  people  in  small 
towns  and  country  districts,  the  use  of  bank  currency  is  con- 
stantly increasing.  The  people  of  the  continent  of  Europe 
have  been  more  backward  in  this  particular  than  the  Eng- 


140  Money  and  Banking 

lish  and  the  American,  but  the  use  of  the  deposit  account 
is  yearly  becoming  more  and  more  popular  there  and  bank- 
notes for  many  years  have  been  widely  used. 

For  the  cash  which  it  needs  the  ordinary  bank  depends 
upon  the  deposits  of  its  customers  and  upon  drafts  on  its 
correspondents.  Any  excess  coming  from  the  former 
source  is  usually  shipped  to  correspondents  and  any  de- 
ficit supplied  by  them.  The  task  of  supplying  the  entire 
country  with  hand-to-hand  money  is  thus  transferred  to 
the  great  financial  centers  in  which  are  located  the  institu- 
tions that  act  as  final  correspondents  for  all  other  banks, — 
in  this  country  to  New  York,  in  England  to  London,  in 
France  to  Paris,  in  Germany  to  Berlin,  etc.  How  this 
problem  is  solved  in  this  and  certain  other  countries  will 
be  discussed  in  a  subsequent  chapter.  Here  it  is  sufficient 
to  say  that  the  regulation  of  the  reserves  cannot  be  disasso- 
ciated from  the  regulation  of  loans  and  discounts  and  note- 
issues.  The  volume  of  the  former  must  be  so  arranged  as 
to  keep  the  deposits  within  such  limits  that  the  cash  avail- 
able will  be  adequate  to  meet  the  demands  of  depositors. 
To  meet  these  demands,  however,  properly  secured  bank 
notes  are  nearly  as  efficient  as  coin  or  any  other  form  of 
hand-to-hand  money,  and  hence  the  method  by  which  they 
are  supplied  and  regulated  is  vital  to  this  discussion. 

In  most  countries  no  attempt  is  made  directly  to  regulate 
the  amount  of  the  reserves  by  law.  To  this  rule,  however, 
the  United  States  is  a  prominent  exception.  Our  national 
banking  act  requires  that  banks  in  country  towns  shall  keep 
a  reserve  of  15  per  cent,  of  their  deposits,  of  which  at  least 
two-fifths  must  be  in  cash  in  their  own  vaults  and  the  re- 
mainder on  deposit  with  approved  national  banks  in  certain 
specified  cities  known  as  reserve  cities.  Banks  in  these 
cities  are  required  to  keep  a  reserve  of  25  per  cent,  of  their 
deposits,  of  which  at  least  one-half  must  be  in  cash  in  their 


The  Regulation  of  Commercial  Banking    141 

own  vaults  and  the  remainder  on  deposit  with  approved 
national  banks  in  the  so-called  central  reserve  cities.  Banks 
in  these  cities  must  keep  25  per  cent,  of  their  deposits  in 
cash  in  their  own  vaults.  Similar  requirements  are  imposed 
upon  other  banks  by  the  laws  of  the  various  states. 

The  efficiency  and  desirability  of  such  laws  are  open  to 
question.  That  they  are  not  essential  to  sound  banking  is 
demonstrated  by  the  experience  of  other  countries.  As  an 
objection  to  them  may  be  urged  the  impossibility  of  classi- 
fying banks  according  to  their  real  needs  for  cash.  Dif- 
ferent localities  make  very  different  demands  upon  their 
banking  institutions,  much  depending  in  this  respect  upon 
the  nature  of  the  business  carried  on  and  something  upon 
the  customs  of  the  region.  Hence,  when  all  banks  are 
placed  in  three  classes,  one  of  two  results  is  quite  certain 
to  follow.  Either  the  limit  set  by  law  will  be  so  low  as  to 
afford  no  real  protection,  or  it  will  be  in  some  cases  so 
high  as  to  seriously  interfere  with  the  accommodation 
which  the  banks  ought  to  be  able  to  render  to  the  business 
of  the  community.  The  weight  of  this  objection  becomes 
more  apparent  when  we  consider  the  effects  of  the  clause 
requiring  banks  to  stop  discounting  as  soon  as  their  cash 
reserves  fall  below  the  legal  limit.  This  regulation  makes 
these  reserves  practically  useless  at  the  time  when  they 
are  most  needed.  Cash  reserves  are  most  apt  to  be  infringed 
upon  in  times  of  incipient  or  actual  crisis,  and  it  is  precisely 
on  such  occasions  that  banks  should  be  able  to  accommo- 
date business  men  to  the  greatest  extent  possible,  that  they 
should  be  able  indeed  to  discount  first-class  securities  in 
even  greater  amounts  than  in  ordinary  times.  The  pro- 
vision in  question,  however,  absolutely  prevents  this,  and 
thus  is  apt  to  exaggerate  the  conditions  which  characterize 
such  periods  of  industrial  unrest. 

6.  Regulation  of  note  issues. — In  the  legal  regulation  of 


142  Money  and  Banking 

the  banking  business  most  states  have  distinguished  be- 
tween depositors  and  noteholders  and  have  granted  special 
protection  to  the  latter.  The  chief  reasons  for  this  prac- 
tice consist  in  the  peculiarities  of  bank-notes  to  which  refer- 
ence has  already  been  made  and  for  present  purposes  may 
be  summarized  as  follows : 

(i)  Notes  circulate  freely  from  hand  to  hand  without 
endorsement,  and,  if  issued  in  the  proper  denominations 
may  answer  nearly  all  the  purposes  of  currency,  even  taking 
the  place  of  coin.  They  are,  therefore,  less  liable  to  be  pre- 
sented for  redemption  than  other  forms  of  bank  currency, 
and  in  consequence  make  fewer  demands  upon  the  cash 
reserve.  If  unrestricted  in  their  operations,  bankers  are 
thus  tempted  to  neglect  their  reserves  and  unduly  to  extend 
their  loans.  Long  and  bitter  experience  has  shown  that 
bankers  are  unable  to  resist  such  temptation,  and  that  un- 
restricted and  unregulated  note  issues  are  a  fruitful  source 
of  bad  banking  and  commercial  disaster. 

(2)  In  order  that  bank-notes  may  perform  their  legit- 
imate functions  they  must  be  rendered  absolutely  safe. 
They  are  the  only  form  of  bank  currency  which  can  serve 
as  hand-to-hand  money,  but  unless  they  are  perfectly  safe 
their  circulation  at  par  is  sure  to  be  restricted  to  the  im- 
mediate locality  in  which  they  are  issued,  and  consequently 
their  general  use  as  a  medium  of  exchange  obstructed. 

Among  the  various  means  employed  for  the  special  pro- 
tection of  noteholders  may  be  mentioned  the  prior  lien  upon 
assets,  the  safety  fund,  the  mortgaging  of  special  assets,  the 
government  guarantee,  and  the  limitation  of  the  total  issues. 
By  the  prior  lien  is  meant  the  requirement  by  law  that  in 
case  of  insolvency  the  claims  of  noteholders  shall  be  sat- 
isfied out  of  the  assets  before  those  of  any  other  creditors. 
The  safety  fund  method  is  best  illustrated  at  the  present 
time  in  Canada.    The  banking  laws  of  that  country  require 


The  Regulation  of  Commercial  Banking    143 

each  bank  of  issue  to  contribute  five  per  cent,  of  the  amount 
of  its  issues  to  a  fund  kept  and  administered  by  a  public 
official.  In  case  of  the  failure  of  any  bank  its  notes  may 
be  paid  at  once  out  of  this  fund,  in  which  case  the  amount 
thus  abstracted  is  replaced  from  the  assets  of  the  bank. 
If  they  are  insufficient,  the  deficiency  in  the  amount  nec- 
essary to  bring  the  fund  to  five  per  cent,  of  the  remaining 
issues  is  made  up  by  an  assessment  on  the  other  banks.  In 
this  case  the  prior  lien  and  the  safety-fund  systems  are 
combined. 

By  the  mortgaging  of  special  assets  is  meant  the  require- 
ment that  banks  of  issue  shall  hold  certain  specified  securi- 
ties, the  proceeds  of  the  sale  or  of  the  collection  of  which, 
in  case  of  insolvency,  shall  be  used  for  the  satisfaction  of 
noteholders'  claims.  This  is  the  method  employed  in  this 
country.  National  banks,  the  only  ones  which  issue  notes, 
are  required  to  deposit  government  bonds  with  the  Comp- 
troller of  the  Currency,  who  then  prepares  and  sends  to 
each  bank  notes  to  the  par  value  but  not  to  exceed  the 
market  value  of  the  bonds  deposited.  The  government 
guarantees  the  payment  of  the  notes,  and  in  case  of  the 
failure  of  the  bank  with  inadequate  resources  uses  the 
bonds  as  a  means  of  indemnifying  itself  for  the  expense 
involved.  This  method  was  also  employed  by  many  of  our 
states  during  the  period  in  which  state  banks  were  issuing 
notes.  Usually  national  bonds,  the  bonds  of  the  state  in 
question,  and  other  specially  designated  bonds,  and  some- 
times real  estate  mortgages,  were  accepted  as  security. 

The  guarantee  of  the  ultimate  payment  of  the  notes  by 
the  state  does  not  necessarily  accompany  the  mortgaging  of 
special  assets,  and  it  might  easily  be  used  independently  or 
in  connection  with  other  methods.  It  cannot  be  recom- 
mended, however,  in  any  case  in  which  adequate  provision 


144  Money  and  Banking 

for  indemnifying  the  state  against  possible  loss  is  not 
made. 

Some  limitation  on  the  total  amount  of  issues  is  common 
even  when  other  methods  of  protecting  noteholders  are 
also  employed.  National  banks  in  this  country  and  the 
banks  of  Canada  are  not  allowed  in  any  case  to  extend  their 
issues  beyond  the  amount  of  their  paid-up  capital  stock. 
In  France  the  law  sets  a  definite  limit  beyond  which  the 
issues  of  the  Bank  of  France  are  not  permitted  to  go,  but 
from  time  to  time  this  limit  has  been  raised.  The  Bank  of 
England  is  permitted  to  issue  £18,450,000  in  notes  on  the 
deposit  of  securities  to  that  amount  with  the  issue  depart- 
ment of  the  bank  and  any  amount  beyond  this  figure  in  ex- 
change pound  for  pound  for  gold  coin  or  bullion.  Banks 
of  issue  in  Germany  are  assigned  a  fixed  quota  which  they 
must  secure  by  means  of  first-class  bills  of  exchange  and 
cash  in  the  proportion  of  not  less  than  one-third  of  the 
latter.  Beyond  this  quota  they  must  secure  their  issues 
either  by  100  per  cent,  of  cash  or  pay  a  tax  of  five  per  cent, 
to  the  government. 

The  relative  advantages  and  disadvantages  of  these 
methods  of  protecting  noteholders  must  be  judged  from 
the  standpoint  of  their  influence  on  the  elasticity  of  the 
issues,  as  well  as  from  that  of  safety.  From  this  point  of 
view  the  plan  of  mortgaging  special  assets  in  the  form  used 
in  this  country  is  defective.  The  requirement  that  govern- 
ment or  other  bonds  must  be  purchased  and  deposited 
with  a  public  official  before  notes  may  be  issued,  and  the 
surrender  of  the  notes,  or  of  an  equivalent  amount  of  cash, 
in  exchange  for  the  bonds  before  notes  can  be  retired 
renders  their  volume  entirely  independent  of  the  needs  of 
commerce,  since  those  needs  bear  no  relation  to  the  profita- 
bleness or  unprofitableness  of  investments  in  bonds  or  to 
the  desirability  of  holding  or  selling  such  bonds  once  in 


The  Regulation  of  Commercial  Banking    145 

the  bank's  possession.  In  order  to  render  the  quantity  of  the 
issues  responsive  to  the  varying  needs  of  the  community  for 
hand-to-hand  money,  banks  must  be  able  to  issue  notes 
freely  in  the  discounting  of  bills  and  the  payment  of 
depositors,  and  to  retire  them  freely  when  the  need  for 
them  has  passed.  The  only  protection  to  noteholders  not 
inconsistent  with  such  freedom  must  therefore  be  based 
upon  such  assets  as  normally  come  into  the  possession  of 
commercial  banks  in  the  performance  of  their  daily  duties. 
All  the  other  methods  above  described  are  free  from  this 
objection,  and  it  is  possible  by  combining  two  or  more  of 
them  also  to  render  the  security  to  the  noteholders  perfect 
from  the  standpoint  of  safety, 

7.  Public  inspection  and  supervision. — Publicity  is  an  im- 
portant safeguard  against  unsound  banking,  and  it  also 
assists  banks  in  obtaining  the  confidence  of  the  public. 
So  important  to  a  bank  is  it  that  the  people  generally 
should  believe  in  its  soundness  and  stability  that  it  is 
probable  that  self-interest  would  lead  them  to  publish  their 
accounts  or  in  some  other  way  keep  the  community  in- 
formed regarding  the  nature  of  their  business.  In  most 
states,  however,  it  has  been  found  best  to  enforce  publicity 
in  one  form  or  another,  the  most  common  method  being  to 
require  the  publication  of  banks'  accounts.  In  the  United 
States  national  banks  are  required  annually  to  ,make  to 
the  Comptroller  of  the  Currency  at  least  five  reports  of. 
their  resources  and  liabilities.  The  dates  for  these  are 
not  specified  in  advance,  the  Comptroller  being  permitted 
to  call  for  them  whenever  he  sees  fit.  When  submitted 
they  must  be  published  in  a  newspaper  in  the  place  where 
the  banking  association  is  established.  In  Germany  banks 
of  issue  are  required  to  make  weekly  reports  which  are 
published  in  the  periodicals.  The  Bank  of  France  is  com- 
pelled by  law  to  furnish  to  the  government  every  six  months 


146  Money  and  Banking 

a  full  statement  of  its  operations,  and  a  balance-sheet  of 
the  bank  is  published  in  the  official  journal  every  Friday. 
The  accounts  of  the  Bank  of  England  are  also  regularly 
published  in  the  financial  journals  of  the  kingdom. 

In  addition  to  the  requirement  that  bank  accounts  must 
from  time  to  time  be  submitted  to  public  inspection,  some 
provision  for  supervision  and  examination  by  public  of- 
ficials is  common.  The  Comptroller  of  the  Currency  in  the 
United  States  is  authorized,  and  indeed  directed  by  law, 
to  inspect  the  national  banks  at  frequent  intervals.  He  has 
full  authority  to  call  for  all  books  and  securities,  and  to 
make  as  full  and  complete  an  examination  as  he  desires. 
In  the  great  state  banks  of  Europe  provisions  for  special  in- 
spection are  rendered  unnecessary  by  the  appointment  of 
public  officials  to  the  immediate  control  of  these  institutions. 
The  governor  and  two  sub-governors  of  the  Bank  of  France 
are  appointed  by  the  ministry.  The  Imperial  Bank  of  Ger- 
many is  under  the  direct  control  of  a  board  of  curators 
composed  of  the  Chancellor  of  the  Empire,  who  is  presi- 
dent, and  four  other  members,  one  named  by  the  Emperor 
and  the  other  three  by  the  federal  council.  This  body  meets 
every  three  months  and  examines  reports  regarding  the 
bank's  condition  and  the  operations  which  are  being  carried 
on.  The  immediate  administration  of  the  Imperial  Bank  is 
confided  to  a  board  of  directors  appointed  directly  by  the 
Imperial  Government  from  a  list  nominated  by  the  federal 
council.  The  Bank  of  England  in  form  is  a  purely  private 
institution,  its  directors  being  appointed  by  the  stockholders, 
but  on  account  of  its  intimate  connection  with  the  English 
government  it  is  practically  under  the  direct  supervision 
of  government  officials. 

The  efficiency  of  the  practice  of  publishing  accounts  as 
a  safeguard  against  unsound  banking  depends  largely  upon 
the  ability  of  the  public  to  interpret  these  statements  when 


The  Regulation  of  Commercial  Banking    147 

they  appear.  It  is  desirable,  therefore,  that  we  should 
examine  a  typical  bank  account  and  note  the  manner  in 
which  the  chief  operations  of  banking  are  revealed  in  its 
items.  The  following  has  not  been  copied  from  any  report, 
but  contains  the  essential  items,  and  may  be  regarded  as 
typical : 

Liabilities.  Resources. 

Capital $100,000     Loans $265,750 

Surplus 20,000     Bonds  and  Stocks 10,000 

Undivided  Profits 2,750     Real  Estate 15,000 

Deposits 264,000     Other  Assets 8,000 

Cash  Reserve 88,000 


$386,750  $386,750 

The  most  important  items  in  this  account  have  already 
been  explained.  By  capital  is  meant  the  funds  originally 
contributed  by  the  stockholders  and  it  stands  here  under  the 
head  of  liabilities  because  the  officers  of  the  bank  are  re- 
sponsible to  them  for  its  use  and  must  distribute  the  divi- 
dends on  the  basis  of  it.  It  should  be  noted,  however,  that 
capital  stock  is  not  payable  on  demand,  and  is  thus  a  very 
different  sort  of  liability  from  deposits  and  notes.  By  sur- 
plus, is  meant  the  profits  which  have  been  earned,  but 
which  are  not  distributed  in  the  form  of  dividends,  but 
left  with  the  bank  in  order  to  strengthen  its  resources. 
The  accumulation  of  a  surplus  amounts  to  an  increase  of 
the  bank's  capital.  The  undivided  profits  are  the  profits 
not  yet  distributed  but  which  will  be  available  for  distribu- 
tion to  the  stockholders  when  the  outstanding  loans  have 
matured.  The  deposits,  as  was  explained  in  a  previous 
chapter,  are  the  sum  total  of  the  credit  accounts  on  the 
books  of  the  bank  in  favor  of  its  customers,  some  of  which 
have  originated  in  loans  and  others  in  the  deposit  of  actual 
cash.     Turning  now  to  resources,  we  note  that  the  item 


148  Money  and  Banking 

loans  is  represented  in  the  bank's  safes  and  portfolios  by 
the  notes  of  business  men  and  corporations,  falling  due, 
some  perhaps  in  thirty,  some  in  sixty,  and  some  in  ninety 
days,  and  by  the  bills  of  exchange  it  has  purchased.  The 
term  bonds  and  stocks  and  real  estate  are  self-explanatory, 
the  latter  being  represented  chiefly  by  the  building  and 
grounds  occupied  by  the  bank.  Under  the  head  other  assets 
are  included  the  various  items  of  miscellaneous  property 
which  in  one  way  and  another  have  come  into  the  possession 
of  the  bank,  possibly  through  the  foreclosure  of  mortgages 
or  other  means  not  necessarily  involved  in  the  prosecution 
of  the  bank's  peculiar  business.  The  cash  reserve  is  the 
cash  on  hand  available  for  the  payment  of  depositors  and 
the  meeting  of  other  cash  obligations. 

As  variations  of  this  typical  account  it  should  be  noted 
that  banks  of  issue  add  to  the  items  falling  under  the  head 
Liabilities  that  of  notes  or  issues;  that  instead  of  the  term 
loans  we  often  meet  the  term  discounts;  and  that  under 
the  general  head  Deposits  may  be  distinguished  current  ac- 
counts and  time  deposits,  and  sometimes  deposits  of  other 
banks  and  private  deposits.  The  Bank  of  England  uses  the 
term  rest  instead  of  surplus. 

The  relation  between  these  various  items  may  best  be 
revealed  by  considering  the  effects  upon  this  account  of  the 
most  important  daily  operations  of  the  bank.  Suppose  that 
new  loans  to  the  extent  of  $3000  are  made,  which  are  to 
mature  on  the  average  in  sixty  days  and  to  bear  interest  at 
six  per  cent.  Three  items  of  the  account  must  then  be 
changed.  The  loans  will  be  increased  to  $268,750  the 
deposits  to  $266,970  ($264,ooo-|-$2.970,  which  is  $3000- 
$30,  the  discount  for  sixty  days),  and  the  undivided 
profits  to  $2,780.  It  should  be  noted  that  the  cash  reserve 
now  bears  a  smaller  proportion  to  the  demand  liabilities 
than  before. 


The  Regulation  of  Commercial  Banking    149 

Suppose  next  that  depositors  draw  upon  their  accounts 
to  the  extent  of  $10,000,  receiving  their  pay  in  cash.  The 
item  deposits  will  then  stand  at  $256,970  and  the  reserve 
at  $78,000.  This  again  reduces  the  proportion  of  the  re- 
serve to  demand  liabilities.  If  these  depositors  had  accepted 
bank-notes  instead  of  cash,  the  result  vv^ould  have  been 
different.  The  reserve  would  have  remained  as  before;  the 
deposits  would  have  been  diminished  to  the  extent  of 
$10,000,  and  a  new  item  of  $10,000,  namely  notes,  consti- 
tuting also  a  demand  liability,  would  have  been  introduced 
on  the  side  of  liabilities.  In  this  case,  the  proportion  be- 
tween reserve  and  demand  liabilities  remains  unchanged. 

Let  us  suppose  next  that  loans  to  the  extent  of  $10,000 
fall  due  and  are  paid  in  cash.  The  item  loans  will  then 
stand  at  $258,750,  having  been  reduced  to  the  extent  of 
$10,000,  and  the  cash  reserve  will  have  been  increased 
to  the  same  extent.  The  payment  of  these  loans  might 
equally  well  have  been  accomplished  by  a  corresponding 
diminution  of  the  item  deposits.  If  the  persons  whose 
notes  have  fallen  due  are  also  depositors,  they  may  hand 
to  the  cashier  of  the  bank  their  checks  for  the  amount.  It 
is  noteworthy  that  in  either  case  the  proportion  of  reserve 
to  demand  liabilities  is  increased. 

A  fourth  supposition  will  enable  us  to  appreciate  the 
effect  of  investments  in  long-time  securities.  When  the 
accounts  of  the  bank  were  in  the  condition  represented  by 
the  statement  on  p.  147,  suppose  that  $50,000  had  been  in- 
vested in  bonds  and  stocks.  The  cash  reserve  would  have 
been  reduced  to  $38,000,  thus  enormously  diminishing  its 
proportion  to  the  demand  liabilities,  and  in  no  respect  in- 
creasing the  bank's  ability  to  command  cash  on  short 
notice,  except  through  the  plan  of  throwing  its  bonds  and 
stocks  upon  the  market  for  sale. 

It  thus  becomes  evident  that  many  of  the  essential  fea- 


150  Money  and  Banking 

tures  of  the  banking  business  are  revealed  in  such  simple 
statements  of  aggregated  items  as  have  been  described. 
The  proportion  of  the  capital  and  the  cash  reserve  to  the 
other  liabilities,  the  extent  of  the  bank's  ability  to  meet 
cash  demands  made  upon  it  and  the  aggregate  of  such 
liabilities,  the  amount  of  the  total  resources  invested  in 
mercantile  securities  as  distinguished  from  stocks,  bonds, 
etc.,  the  extent  of  liabilities  to  other  banks  as  well  as  of  the 
claims  upon  them,  ought  all  to  become  clear  upon  the 
examination  of  such  an  account.  Adequate  provision  for 
supervision  and  examination  by  public  officials  ought  to 
guarantee  the  correctness  of  the  accounts,  and  make  bank 
officials  careful  regarding  the  character  and  soundness  of 
the  men  whose  paper  they  discount. 

8.  Importance  of  honesty,  wisdom,  and  discretion  in  bank 
officials. — Since  the  chief  reliance  of  a  bank,  beyond  its 
actual  reserve,  must  be  placed  upon  the  short-time  business 
paper  which  it  holds,  it  follows  that  the  best  security  for 
its  safety  must  be  the  honesty,  wisdom,  and  discretion  of 
its  officers.  Upon  these  rests  the  responsibility  of  selecting 
the  bank's  creditors.  If  these  are  reliable,  if  they  always 
meet  their  obligations  when  they  fall  due,  and  if  their 
business  is  sound,  the  bank  will  be  safe,  provided  a  proper 
proportion  between  the  demand  liabilities  and  the  cash 
reserve  is  maintained.  What  this  proportion  should  be  is 
a  matter  which,  as  we  have  shown,  must  be  left  to  the  dis- 
cretion of  bank  officials. 

In  this  connection  it  is  interesting  to  note  that  the  interest 
of  bankers  as  a  class  is  in  the  maintenance  of  sound  rather 
than  loose  methods.  To  no  group  of  business  men  is  an 
unimpeachable  reputation  for  financial  soundness  and 
reliability  more  vital.  The  banker's  stock  in  trade  is  his 
credit.  If  that  goes,  his  business  is  ruined.  Under  these 
circumstances  he  is  like  a  retail  merchant  with  no  goods 


The  Regulation  of  Commercial  Banking    151 

upon  his  shelves.  He  has  nothing  to  sell.  He  is  really 
much  worse  off  than  the  merchant,  since  the  latter  can  stock 
up  his  store  with  fresh  goods  which  will  tempt  the  public  to 
buy,  while  the  banker  can  rarely  buy  back  his  lost  or  shat- 
tered credit.  There  is  no  such  thing  in  the  market  for 
sale,  and  if  he  ever  recovers  it,  it  will  be  by  the  slow  process 
of  a  life  of  business  integrity,  thus  convincing  the  public 
that  he  is  worthy  of  confidence.  In  view  of  this  fact, 
bankers  are  apt  to  be  conservative  and  to  constitute  a  check 
each  upon  the  other. 

REFERENCES 

For  the  methods  actually  employed  in  the  regulation  of  commercial 
banking  in  this  country  the  national  banking  act  and  the  banking  laws 
of  the  various  states  should  be  consulted.  An  excellent  digest  of  the 
latter  has  recently  been  compiled  by  Mr.  Samuel  A.  Welldon  and  pub- 
lished by  the  National  Monetary  Commission.  The  annual  reports  of 
the  Comptroller  of  the  Currency  and  of  the  banking  departments  of  the 
various  states  are  also  valuable.  For  foreign  countries  consult  the  pub- 
lications of  the  National  Monetary  Commission,  especially  Koch,  Ger- 
man Imperial  Banking  Lams;  Flux,  The  Swedish  Banking  System; 
Conant,  The  National  Bank  of  Belgium,  and  the  Banking  System  of 
Mexico;  Landmann,  The  Swiss  Banking  Law;  The  Beichsbank,  1876- 
1900;  and  Interviews  on  the  Banking  and  Currency  Syste?ns  of  Eng- 
land, Scotland,  France,  Germany,  Switzerland ,  and  Italy. 

Consult  also  Macleod,  v.  11,  chs.  xviii  and  xix ;  Dunbar,  History  and 
Theory  of  Banking,  chs.  vi-xi ;  Report  of  the  Monetary  Commission 
of  the  Indianapolis  Convention,  pp.  244-246;  Gilbart,  The  History  and 
Principles  of  Banking,  v.  i,  ch.  xxi;  Wagner,  Zettlebankgesetzgebung, 
ch.  ii,  sec.  3,  and  ch.  iii,  sees.  2  and  4,  and  his  Kredit  und  Bankwesen, 
ch.  ii,  sec.  2;  Scharling,  Bankpolitik;  Hague,  Bank  Reserves,  and 
Stewart,  A  Composite  Bank  Statement,  in  Journal  of  the  Canadian 
Bankers'  Assn.,  v.  i,  p.  107,  and  v.  xi,  p.  40,  respectively. 


CHAPTER  X 
BANKING  IN  THE  UNITED  STATES 

During  the  early  years  of  the  history  of  this  country 
every  community  suffered  from  the  lack  of  an  adequate 
medium  of  exchange  and  from  an  insufficiency  of  capital. 
The  degree  of  the  need  felt  for  these  two  essentials  of  in- 
dustrial progress  was  greatest  on  the  frontier,  but  it  was 
everywhere  present,  even  in  the  largest  towns.  Before  the 
adoption  of  our  present  constitution,  and  for  many  years 
thereafter,  our  supply  of  specie  came  from  foreign  countries 
as  the  result  of  the  operation  of  our  foreign  commerce,  and 
what  we  obtained  in  this  way  was  chiefly  used  in  the  opera- 
tions of  the  government  and  in  the  purchase  of  foreign  com- 
modities. The  supply  was  almost  always  short  of  the  de- 
mand and  in  frontier  communities  frequently  nil.  As  for 
capital,  the  majority  of  the  settlers  on  the  frontier  had 
little  more  than  the  bare  necessities  for  a  farming  estab- 
lishment in  the  wilderness.  The  accumulation  of  anything 
more  was  a  slow  process  on  account  of  the  lack  of  adequate 
markets  for  their  produce,  a  situation  the  remedy  for  which 
had  to  wait  for  the  development  of  means  of  transportation 
adequate  to  connect  scattered  communities  with  each  other 
and  with  the  older  countries  beyond  the  seas. 

The  colonial  governments  put  forth  their  best  endeavors 
to  supply  these  needs,  and  the  people  attempted  to  help 
themselves.  Unfortunately  both  confused  the  need  for  a 
currency  with  that  for  capital  with  the  result  of  attempting 
to  make  the  same  instrumentality  answer  both  purposes. 
The  most  commonly  employed  expedient  was  bills  of  credit 

152 


Banking  in  the  United  States  153 

issued  in  a  form  suitable  for  circulation  as  money.  The 
colonial  governments  frequently  made  such  issues  on  their 
own  credit,  using  the  notes  in  the  payment  of  their  expenses 
or  loaning  them  to  people  on  mortgage  or  personal  se- 
curity. Private  individuals  and  associations  often  did  the 
same  thing.  The  notes  thus  issued  circulated  within  a  lim- 
ited territory  only  and  at  a  depreciated  value,  thus  perform- 
ing very  imperfectly  the  functions  of  a  medium  of  ex- 
change, but  they  were  considered  so  much  better  than  noth- 
ing that  the  people  resented  attempts  made  by  the  English 
government  to  interfere  with  their  right  to  use  them.  Dur- 
ing its  early  years  the  Revolutionary  war  was  chiefly  fi- 
nanced by  similar  notes  issued  by  the  Continental  Congress. 

In  spite  of  the  extended  use  of  these  notes  and  the  sen- 
sitiveness of  the  public  regarding  interference  with  their 
right  to  use  them,  their  imperfections  as  a  circulating  me- 
dium were  so  well  understood  by  well  informed  people  at 
the  time  of  the  adoption  of  our  constitution  that  the  con- 
vention which  framed  that  document  incorporated  in  it  a 
clause  prohibiting  the  states  in  the  future  to  emit  bills  of 
credit  or  to  make  anything  except  gold  and  silver  coin  legal 
tender  in  payment  of  debts.  It  also  gave  to  the  federal 
government  the  exclusive  right  to  manufacture  such  coins. 
However,  the  needs  which  were  primarily  responsible  for 
the  issue  of  these  bills  of  credit  remained  and  clamored 
for  satisfaction  for  many  years  after  the  new  government 
went  into  operation,  and  the  means  devised  for  their  satis- 
faction were  banks  of  issue  chartered  by  the  federal  gov- 
ernment and  by  the  states,  or  established  by  private  indi- 
viduals under  authority  of  the  common  law. 

I.  The  earliest  banks. — The  pioneer  institution  of  this 
type  was  incorporated  by  the  Continental  Congress  Dec.  31, 
1781,  under  the  name  of  the  Bank  of  North  America.  The 
plan  for  it  was  devised  by  Gouverneur  Morris,  but  its  pro- 


154  Money  and  Banking 

motion  was  chiefly  the  work  of  Robert  Morris,  then  Super- 
intendent of  Finance.  Feb.  7,  1784,  the  legislature  of  Mas- 
sachusetts chartered  a  similar  institution  under  the  name 
of  the  Bank  of  Massachusetts,  and  later  in  the  same  year 
the  bank  of  the  State  of  New  York  was  started  in  New 
York  City  by  Alexander  Hamilton  and  others,  which,  how- 
ever, did  not  obtain  a  charter  from  the  state  until  1791. 
In  1790  the  legislature  of  Maryland  chartered  the  Bank 
of  Maryland;  in  1791  the  Bank  of  Providence  was  char- 
tered in  Rhode  Island;  and  on  Feb.  25  of  the  same  year 
Congress  chartered  the  Bank  of  the  United  States. 

In  the  details  of  their  organization  and  of  their  business 
these  and  other  banks  subsequently  formed  differed  consid- 
erably and  sometimes  widely,  but  in  general  characteristics 
they  were  alike.  Their  principal  business  consisted  in  the 
exchange  of  their  own  non-interest-bearing  notes,  payable 
on  demand,  for  the  interest-bearing  notes  of  merchants, 
farmers  and  others  payable  at  future  dates,  and  frequently 
for  the  securities  of  the  United  States,  the  various  states 
and  the  private  corporations  of  the  time.  They  also  re- 
ceived deposits  and  conducted  checking  accounts  for  cus- 
tomers and  bought  and  sold  domestic  and  foreign  exchange. 
On  account  of  the  great  and  almost  universal  need  for 
capital,  deposits  were  very  small,  nearly  every  person  want- 
ing more  than  he  possessed  and  desiring  from  banks  loans 
rather  than  a  place  of  safe-keeping  for  surplus  funds.  The 
notes  issued  by  the  banks  circulated  as  money,  and,  though 
they  were  supposed  to  be  payable  on  demand  in  specie,  and 
usually  required  by  their  charters  or  by  general  laws  so  to 
be  paid,  they  were  not  expected  to  be  presented  for  pay- 
ment unless  the  need  for  specie  was  very  urgent.  This  ex- 
pectation was  based  partly  upon  experience,  and  partly 
upon  public  sentiment,  which  was  wide-spread  to  at  least 
the  middle  of  the  last  century,  that  it  was  unfair,  if  not 


Banking  in  the  United  States  155 

dishonorable,  to  demand  specie  of  a  bank  except  under 
special  circumstances.  The  charters  of  these  banks  uni- 
formly provided  for  the  accumulation  of  a  capital  fund  by 
contributions  from  the  proprietors,  a  portion  of  which  was 
required  to  be  paid,  generally  in  part  at  least  in  specie,  be- 
fore the  bank  should  be  permitted  to  do  business  with  the 
public. 

2.  The  first  United  States  Bank.— The  Bank  of  the  Uni- 
ted States  was  the  greatest  of  these  early  institutions  and 
served  as  a  model  for  many  others.  In  addition  to  the 
fundamental  needs  already  described,  special  ones  peculiar 
to  the  time  and  to  the  United  States  government,  account 
for  its  establishment.  These  were  strongly  and  convincing- 
ly urged  by  Alexander  Hamilton  in  a  report  on  the  sub- 
ject presented  to  Congress  Dec.  13,  1790.  On  account  of 
the  scarcity  of  specie  and  the  local  character  of  the  cir- 
culation of  the  banks  chartered  by  the  states  there  was 
great  need  of  currency  that  would  be  uniform  in  value  and 
equally  acceptable  in  all  parts  of  the  country.  The  govern- 
ment also  needed  safe  places  for  the  deposit  of  its  revenues 
as  they  were  collected  at  the  various  seaports  and  interior 
towns,  means  of  transferring  funds  from  one  part  of  the 
country  to  another,  and  facilities  for  obtaining  loans  to 
meet  temporary  exigencies.  Hamilton  showed  that  a  na- 
tional bank  would  satisfy  these  and  other  needs,  and  that 
without  one  they  were  likely  to  remain  either  in  whole  or 
in  part  unsatisfied.  There  was  great  opposition  to  his  plan 
on  account  of  the  belief  of  many  that  the  constitution  did 
not  confer  upon  Congress  the  right  to  grant  charters  of 
incorporation  and  on  account  of  the  monopolistic  character 
of  the  proposed  institution  and  for  various  other  reasons, 
but  Hamilton's  arguments  finally  prevailed  to  the  extent  of 
inducing  a  majority  of  Congressmen  to  vote  for  the  char- 
ter and  President  Washington  to  sign  it  in  opposition  to 


156  Money  and  Banking 

the  advice  of  the  Attorney  General  and  the  Secretary  of 
State.  The  chief  features  of  the  institution  authorized  by 
this  charter  were  the  following: 

A  capital  stock  of  $10,000,000  of  which  $8,000,000  was 
to  be  subscribed  by  private  individuals,  paid  one-fourth  in 
specie  and  three-fourths  in  evidences  of  the  public  debt, 
and  $2,000,000  by  the  federal  governnTent ;  a  directorate  of 
twenty-five  persons  who  should  be  citizens  of  the  United 
States,  and  should  be  elected  by  the  stockholders  according 
to  a  plan  which  gave  small  holders  relatively  more  votes  in 
proportion  to  their  shares  of  stock  than  large  ones ;  foreign 
stockholders  were  handicapped  by  not  being  eligible  as  di- 
rectors and  by  not  being  allowed  to  vote  by  proxy ;  the  total 
indebtedness  of  the  bank,  including  its  note-issues,  were 
not  to  exceed  $10,000,000  over  and  above  the  deposits;  it 
was  permitted  to  sell  but  not  to  buy  public  stock,  and 
was  prohibited  from  dealing  in  anything  "except  bills  of 
exchange,  gold  or  silver  bullion,  or  in  the  sale  of  goods 
really  and  truly  pledged  for  money  lent,  and  not  redeemed 
in  due  time,  or  of  goods  which  shall  be  the  produce  of  its 
lands;"  it  was  prohibited  from  loaning  to  the  federal  gov- 
ernment more  than  $100,000  or  to  any  state  more  than 
$50,000  without  being  previously  authorized  so  to  do  by 
law,  and  from  loaning  any  sum  to  any  foreign  prince  or 
state;  it  was  required  to  make  statements  of  its  condition 
to  the  head  of  the  treasury  department  when  required  but 
not  oftener  than  once  a  week,  and  to  submit  to  his  inspec- 
tion such  books  and  accounts  as  were  necessary  for  the 
verification  of  such  statements,  provided,  that  he  should 
not  have  access  to  the  accounts  of  the  bank  with  private 
persons ;  its  notes  payable  on  demand  in  gold  and  silver 
were  to  be  receivable  for  all  payments  to  the  United  States ; 
its  main  office  was  to  be  located  in  the  city  of  Philadelphia, 
but  the  directors  were  authorized  to  establish  offices  of 


Banking  in  the  United  States  157 

discount  and  deposit  wheresoever  they  might  think  fit;  the 
Hfe  of  the  corporation  was  to  continue  until  March  4,  181 1, 
and  during  that  time  no  other  bank  was  to  be  chartered  by 
Congress. 

In  pursuance  of  authority  conferred  by  the  charter,  the 
directors  estabhshed  branches  at  Boston,  New  York,  Baki- 
more,  Washington,  Norfolk,  Va.,  Charleston,  Savannah 
and  New  Orleans.  The  government  used  the  bank  as  a 
depository  for  its  funds  and  frequently  borrowed  from  it, 
at  times,  under  authority  conferred  by  law,  in  amounts 
greatly  in  excess  of  the  $100,000  mentioned  in  the  charter. 
The  government  received  dividends  on  its  stock  in  excess 
of  eight  per  cent,  per  annum  and  finally  sold  it  at  a  good 
premium.  Throughout  its  history  the  bank  redeemed  its 
notes  on  demand  in  specie  and  supplied  the  country  with  a 
much  needed  uniform  currency.  That  its  services  to  com- 
merce in  general  were  great  and  all  that  its  promoters  ex- 
pected, is  probable,  though  the  data  which  has  come  down  to 
us  concerning  its  career  is  insufficient  to  form  the  basis  of  a 
positive  judgment  regarding  the  matter. 

3.  State  banks  in  the  period  1791  to  181 1. — State  banks 
steadily  increased  in  numbers  throughout  this  period. 
There  were  more  than  thirty  in  existence  in  1800,  and 
more  than  eighty  in  18 10.  Most  of  them  were  in  New 
England,  New  York  and  Pennsylvania,  but  no  state  was 
without  them.  They  furnished  banking  facilities  to  com- 
munities not  reached  by  the  United  States  bank  and  its 
branches,  and  supplemented  and  even  competed  with  that 
institution  in  the  cities  in  which  these  branches  were  located. 
The  growth  of  these  institutions  was  fostered  by  the  state 
governments  which  frequently  contributed  a  portion  of 
their  capital  stock,  and  by  the  spirit  of  speculation  which 
was  widespread.  Many,  possibly  all,  of  them  attempted  to 
perform  functions  for  which  they  were  unfitted,  namely, 


158  Money  and  Banking 

that  of  furnishing  fixed  capital  to  farmers,  manufacturers, 
merchants  and  others  interested  in  the  transportation  and 
other  enterprises  of  the  time.  To  this  end  they  issued  notes 
in  exchange  for  investment  securities  maturing  after  long 
periods  of  time,  the  ultimate  payment  of  many  of  which 
depended  upon  the  increase  of  enterprises  only  just  started 
or  merely  planned  at  the  time  and  which  could  not  possibly 
become  income-producing  before  the  lapse  of  years.  For 
the  redemption  of  notes  thus  issued  the  banks  made  no 
adequate  provision  in  the  capital  fund  collected  from  their 
stockholders  and  none  was  forthcoming  from  the  individ- 
uals and  corporations  whose  names  were  on  the  securities 
held,  or  from  the  stock  markets  of  the  time.  They  were, 
therefore,  forced  to  resort  to  devices  to  prevent  their  notes 
being  returned  for  payment,  such  as  the  putting  of  them 
into  circulation  in  distant  states  or  cities,  the  location 
of  the  issuing  offices  in  inaccessible  places  and  the  in- 
vention of  obstacles  of  one  kind  or  another  to  prevent  or 
delay  the  payment  of  the  notes  when  they  were 
presented. 

Fraud  was  also  practiced.  Many  banks  were  established 
merely  for  the  purpose  of  launching  some  enterprise  in 
which  the  promoters  were  interested  and  without  any  equip- 
ment for  serving  the  public  or  any  purpose  of  rendering 
such  service.  In  such  cases  the  capital  subscribed  was  fre- 
quently represented  simply  by  stock  notes  and  the  note 
issues  by  the  securities  of  the  enterprise  or  enterprises  in 
which  the  promoters  were  interested.  These  notes  were 
paid  to  the  people  who  furnished  the  materials  and  labor 
required  and  through  them  entered  into  general  circulation. 
Having  practically  nothing  at  stake,  the  promoters  made 
large  profits  so  long  as  the  notes  were  not  returned  for  re- 
demption and  had  nothing  to  lose  from  refusal  to  redeem 
them  when  they  were  so  presented. 


Banking  in  the  United  States  159 

4.  The  period  181 1  to  1816.— The  charter  of  the  First 
United  States  Bank  expired  in  181 1  and  a  bill  authorizing 
the  continuation  of  its  existence  for  another  twenty  years 
failed  to  pass  Congress.  The  objections  to  the  bank  urged 
in  1790  were  revived  and  the  state  banking  interests  were 
in  strong  opposition.  Some  of  Hamilton's  arguments  in 
its  favor,  presented  in  1790,  did  not  apply  with  equal  force 
in  181 1  on  account  of  the  multiplication  of  state  banks, 
and  the  fact  that  a  large  part  of  its  stock  was  owned 
by  foreigners,  operated  powerfully  against  it  at  this 
particular  time  because  of  our  strained  relations  with 
England. 

The  prospective  and  actual  removal  of  the  competition 
of  this  powerful  institution  resulted  in  a  rapid  increase  in 
the  number  of  state  banks.  One  authority  *  estimates  the 
number  established  between  Jan.  i,  181 1,  and  Jan.  i,  181 5, 
at  one  hundred  and  twenty.  "The  state  of  Pennsylvania 
alone,  by  a  single  act  of  the  21st  of  March,  1814,  created 
forty-one  banks  with  a  capital  of  about  $17,000,000,  thirty- 
seven  of  which  went  into  operation"  (Ibid.).  In  1812 
war  was  declared  against  England  and  the  struggle  on  land 
and  sea  thus  inaugurated  and  continued  for  two  years  near- 
ly destroyed  our  foreign  commerce,  financially  embarrassed 
the  federal  treasury  and,  combined  with  other  influences, 
in  1814,  caused  the  suspension  of  specie  payments  in  all 
parts  of  the  country  except  New  England.  In  the  middle 
states,  the  south  and  the  west,  bank-notes  fell  to  a  discount 
varying  according  to  the  reputation  for  soundness  of  the 
issuing  institution  and  its  distance  from  the  commercial 
centers;  specie  disappeared  from  circulation;  prices  rose; 
and  speculation  became  rampant.  The  embarrassment  of 
the  Treasury  was  greatly  increased  by  the  necessity  of  re- 
ceiving its  revenues  in  depreciated  notes  of  local  currency 

*  Pitkin's   Statistics,  p.   429. 


i6o  Money  and  Banking 

only  and  by  the  necessity  of  depositing  its  funds  in  non- 
specie-paying  state  banks. 

5.  The  second  United  States  Bank. — The  remedy  for 
these  unfortunate  financial  conditions,  proposed  and  ulti- 
mately adopted,  was  a  second  United  States  Bank,  the  char- 
ter for  which  was  enacted  into  law  in  1816.  It  was  mod- 
eled after  that  of  the  first  bank  differing  from  it  in  the 
following  particulars  chiefly :  its  capital  was  fixed  at  $30,- 
000,000  that  of  the  first  bank  being  $10,000,000;  of  the 
twenty-five  directors  the  President  was  authorized  to  select 
five,  whereas  in  the  case  of  the  first  bank  the  government 
voted  its  stock  like  any  other  stockholder;  the  section  pro- 
viding for  the  establishment  of  branches  was  much  more 
specific  and  elaborate  in  the  second  than  in  the  first  char- 
ter, the  bank  being  required  to  establish  a  branch  in  the 
District  of  Columbia  when  Congress  should  demand  it  and 
one  in  any  state  upon  application  of  its  legislature  and  on 
condition  that  at  least  two  thousand  shares  of  its  stock  be 
held  in  said  state ;  a  penalty  for  the  suspension  of  specie  pay- 
ments was  imposed,  the  amount  being  fixed  at  12  per  cent, 
interest  per  annum  on  the  obligations  of  the  bank ;  there  was 
no  such  penalty  specified  in  the  first  charter;  the  funds  of 
the  United  States  were  to  be  deposited  in  the  bank,  unless 
the  Secretary  of  the  Treasury  should  direct  otherwise,  in 
which  case  he  was  obliged  to  lay  before  Congress  his 
reasons  for  such  action.  No  provision  regarding  this  mat- 
ter appeared  in  the  first  charter.  The  amount  which  might 
be  loaned  to  the  United  States  Government  without  further 
authorization  from  Congress  was  fixed  at  $500,000,  this 
amount  in  the  first  charter  having  been  $100,000.  Con- 
gress reserved  the  right  to  inspect  the  books  and  to  examine 
into  the  proceedings  of  the  bank  through  committees  ap- 
pointed by  either  house  for  that  purpose.  No  such  clause 
appeared  in  the  first  charter. 


Banking  in  the  United  States  i6i 

The  organization  of  this  bank  was  completed  during  the 
last  half  of  1816  and  by  the  end  of  1817  branch  offices  had 
been  established  at  New  York,  New  Orleans,  Boston,  Ports- 
mouth, N.  H.,  Providence,  R.  I.,  Pittsburg,  Pa.,  Baltimore, 
Washington,  Richmond  and  Norfolk,  Va.,  Fayetteville,  N. 
C,  Charleston,  S.  C,  Savannah,  Ga.,  Louisville  and  Lex- 
ington, Ky.,  Cincinnati  and  Chillicothe,  O.,  and  Middletown, 
Conn.  Subsequently  branches  were  opened  at  Hartford, 
Conn.,  Mobile,  Ala.,  Nashville,  Tenn.,  Portland,  Me.,  St. 
Louis,  Mo.,  Buffalo  and  Utica,  N.  Y.,  Burlington,  Vt.,  and 
Natchez,  Miss.  One  of  the  first  tasks  imposed  on  the  bank 
was  the  securing  of  the  resumption  of  specie  payments 
throughout  the  country.  This  it  ultimately  accomplished 
aided  by  an  agreement  with  the  state  banks  by  which  the 
transfer  of  the  public  deposits  was  facilitated.  During  the 
years  1818  and  18 19  the  management  of  the  bank  was  bad 
and  the  commercial  crisis  through  which  the  country  passed 
in  those  years  created  conditions  unfavorable  to  its  devel- 
opment and  reputation.  Under  the  able  administration  of 
Nicholas  Biddle,  however,  who  became  its  president  in 
1823,  the  bank  became  a  strong  and  highly  useful  institu- 
tion, checking  the  tendencies  of  the  state  banks  toward 
overtrading  and  other  unsafe  practices,  aiding  the  govern- 
ment in  the  conduct  of  its  financial  affairs  and  furnishing 
commerce  with  a  uniform  currency  convertible  on  demand 
into  specie  and  with  better  facilities  for  loans  and  for  do- 
mestic and  foreign  exchange  than  it  ever  before  enjoyed. 

Because  of  the  bad  management  of  early  years,  mis- 
takes of  judgment  and  policy  occasionally  made  subsequent- 
ly and  various  circumstances  over  which  its  officers  had 
no  control,  the  bank  made  many  enemies  who  became  strong 
enough  in  1834  to  defeat  a  bill  introduced  into  Congress 
providing  for  its  recharter.  The  most  formidable  of  these 
enemies  were  the  state  banks,  the  people,  principally  poli- 


1 62  Money  and  Banking 

ticians,  whose  personal  interests  and  feelings  had  been  in- 
jured from  time  to  time  by  the  measures  Biddle  and  his 
associates  had  found  it  necessary  or  desirable  to  execute 
in  the  interests  of  the  bank,  and  President  Jackson.  The 
latter  was  possessed  of  a  deep  seated  antipathy  against  and 
a  fear  of  all  banks  and  some  of  his  party  associates  and 
advisors,  who  were  violent  enemies  of  this  particular  insti- 
tution used  their  influence  to  convince  him  that  it  not  only 
ought  not  to  be  rechartered,  but  that  it  was  an  unsafe  place 
for  the  government  deposits.  The  war  against  the  bank 
began  in  earnest  in  1832  during  the  campaign  for  Jackson's 
election  to  the  Presidency  for  a  second  term  and  resulted 
in  the  removal  of  the  public  deposits  in  the  autumn  of  1833 
and  a  defeat  of  the  bill  for  recharter  in  1834.  After  the 
expiration  of  its  charter  the  bank  continued  to  operate  for 
a  time  as  a  state  institution  under  a  charter  granted  by  the 
legislature  of  Pennsylvania. 

6.  The  establishment  of  the  Independent  Treasury  Sys- 
tem.— After  the  withdrawal  of  the  government  deposits 
from  the  second  United  States  Bank  the  public  funds  were 
placed  in  selected  state  banks  conveniently  located  in  dif- 
ferent parts  of  the  Union.  The  crisis  of  1837  brought  most 
of  these  into  a  state  of  suspended  specie  payments  and 
many  of  them  into  bankruptcy.  The  public  deposits  were 
thus  rendered  either  unavailable  or  payable  only  in  depre- 
ciated state  bank  notes,  and  the  government  suffered  greatly 
from  the  resulting  financial  embarrassment.  Out  of  the  agi- 
tation which  followed  sprang  our  Independent  Treasury 
System. 

The  act  for  the  establishment  of  this  system  was  passed 
in  1840,  repealed  in  1841,  and  reenacted  in  1846.  The  main 
provisions  of  the  latter  act  were  as  follows :  So-called  sub- 
treasuries  were  to  be  established  at  Philadelphia,  New  York, 
Boston,  Charleston,  St.  Louis,  New  Orleans,  San  Francisco, 


Banking  in  the  United  States  163 

Denver,  Carson  City  and  Boise  City  *  to  be  presided  over 
by  assistant  treasurers.  In  the  safes  and  vaults  to  be  pro- 
vided at  these  places  and  at  the  main  treasury  at  Washing- 
ton were  to  be  kept  the  funds  of  the  government,  receiving 
and  distributing  officers  being  required  to  deposit  therein, 
instead  of  in  banks,  whatever  funds  should  come  into  their 
hands  after  Apr.  i,  1847.  All  payments  to  and  from  the 
government  were  to  be  made  in  coin.  Provision  was  made 
for  the  transfer  of  funds  from  one  sub-treasury  to  another 
and  for  the  other  necessary  details  of  the  system.  This 
method  of  managing  the  public  funds  subsequently  modified 
in  important  particulars  has  continued  to  the  present  day. 

7.  The  growth  and  reputation  of  state  banks. — State 
banks  increased  rapidly  in  numbers  throughout  the  period 
of  the  life  of  the  second  United  States  bank  and  down  to 
the  outbreak  of  the  Civil  War.  Their  distribution  among  the 
various  states  and  territories  varied  considerably  in  different 
years,  but  every  state  was  fairly  well  supplied  at  most  times. 

To  the  student  the  most  interesting  and  important  phase 
of  the  history  of  these  institutions  not  yet  considered  is  the 
effort  of  the  various  states  or  of  the  banks  themselves  to 
provide  safeguards  and  suitable  regulations  for  the  business. 
In  this  work  the  states  of  Massachusetts  and  New  York 
were  leaders.  In  the  former  legislation  with  this  end  in 
view  began  as  early  as  1792  and  has  continued  at  intervals 
down  to  the  present  day.  It  was  not  always  consistent  and 
was  frequently  ineffective,  but  it  improved  with  time  and 
on  the  whole  does  credit  to  the  state.  This  legislation  was 
incorporated  in  charters  granted  to  banking  institutions  and 
in  general  laws  of  which  the  most  important  were  passed  in 
1805,  1806,  1809,  1829,  1835,  and  i860.     Charters  were 

*By  subsequent  acts  the  sub-treasuries  at  Charleston,  Denver,  Carson 
City,  and  Boise  City  were  discontinued,  and  others  estabhshed  at  Balti- 
more, Cincinnati,  and  Chicago. 


164  Money  and  Banking 

granted  by  nearly  every  legislature  during  the  early  years, 
and  while  they  had  many  features  in  common  there  was 
diversity  in  many  particulars. 

Among  the  most  instructive  portions  of  this  legislation 
were  those  which  aimed  at  compelling  banks  to  secure  from 
their  proprietors  a  stock  of  capital  and  to  regulate  the  mag- 
nitude of  their  business  in  accordance  therewith.  It  was 
easy  to  induce  people  to  subscribe  for  bank  stock,  but  quite 
another  matter  to  compel  them  actually  to  pay  the  amounts 
subscribed.  A  very  common  practice  with  bank  proprietors 
in  Massachusetts  and  elsewhere  throughout  the  union  was 
to  give  to  the  bank  their  notes  for  the  whole  or  a  large 
part  of  their  stock  subscriptions,  expecting  to  pay  the  interest 
out  of  profits  and  never  to  pay  the  principal.  Banks  thus 
started  had  to  depend  wholly  or  largely  upon  deposits  for 
their  stock  of  cash  and,  if  these  were  meager,  and  they 
usually  were  in  the  early  days,  they  did  business  almost  ex- 
clusively with  their  own  notes,  which  were  forced  into  cir- 
culation in  as  large  quantities  as  possible  and  their  pay- 
ment evaded  by  every  possible  device. 

In  a  charter  of  the  Union  Bank  incorporated  in  1792  it 
was  prescribed  that  the  capital  stock  should  be  paid  in 
three  instalments  and  that  any  subscriber  who  did  not  pay 
at  the  times  designated  should  forfeit  previous  payments 
and  his  right  to  subscribe.  In  another  charter  granted  in 
1795  a  less  stringent  provision  was  incorporated  to  the 
effect  that  after  any  instalment  had  become  due  no  stock- 
holder should  be  allowed  to  borrow  at  the  bank  until  his 
share  had  been  paid.  Such  provisions  being  easily  and 
frequently,  if  not  commonly,  evaded  or  actually  violated, 
in  many  charters  granted  later  it  was  provided  that  the 
bank  should  make  no  loans  whatever  until  satisfactory  evi- 
dence had  been  presented  to  the  Governor  and  Council  that 
the  entire  capital  stock  had  been  actually  paid  in  coin  and 


Banking  in  the  United  States  165 

was  actually  present  in  the  vaults  of  the  bank.  This  regu- 
lation was  sufficiently  stringent,  but  its  enforcement  had 
to  be  provided  for.  To  this  end  oaths  of  directors  to  the 
effect  that  the  requirements  of  the  law  had  been  met  were 
required  in  the  charter  of  the  State  Bank  granted  in  181 1 
and  in  that  of  the  New  England  Bank  granted  in  1813  it 
was  provided  that  commissioners  appointed  by  the  Gov- 
ernor should  actually  count  the  cash  as  well  as  take  the 
affidavits  of  directors  that  the  cash  on  hand  belonged  to 
the  bank  and  was  intended  to  be  used  in  its  business.  Such 
regulations  were  at  times  violated  with  impunity  by  false 
oaths  and  by  the  borrowing  of  coin  for  the  commissioners 
to  count.  The  proper  enforcement  of  these  and  other  laws 
had  to  wait  for  the  development  of  a  better  and  stronger 
public  sentiment  and  for  an  all-round  improvement  in  the 
efficiency  of  the  state  government. 

Logically  connected  with  the  legislation  just  described 
is  that  which  aimed  at  limiting  the  liabilities  of  banks  to 
some  proportion  of  the  capital  stock.  In  the  act  of  1792 
amending  the  charter  of  the  Bank  of  Massachusetts  it  was 
provided  that  note  issues  and  money  loaned  by  a  credit  on 
the  books  or  otherwise  should  not  exceed  double  the  amount 
of  the  gold  and  silver  actually  deposited  in  the  bank  and 
held  to  answer  demands  against  the  same.  The  charter  of 
the  Boston  Bank  incorporated  in  1803  provided  that  debts 
to  or  from  the  bank  should  not  exceed  double  the  amount 
of  the  capital  stock  paid  in,  a  provision  incorporated  in 
many  other  charters  granted  before  181 1.  After  that  date, 
and  previous  to  1829,  the  limit  on  note-issues  most  often 
imposed  was  150  per  cent,  of  the  paid  up  capital.  In  some 
cases,  however,  it  was  100  per  cent,  and  in  a  few  50  per 
cent.*  The  general  law  relative  to  banking  passed  in  1829 
fixed  it  at  125  per  cent. 

*Sound  Currency,  v.  ii.  No.  13,  p.  256. 


1 66  Money  and  Banking 

A  further  means  of  limiting  note  issues  as  well  as  of 
compelling  banks  to  keep  on  hand  a  stock  of  specie  was  a 
provision  first  incorporated  in  the  charter  of  the  Union 
Bank  granted  in  i8i  i  imposing  a  payment  of  24  per  cent,  per 
annum  on  the  notes  of  a  bank  in  case  of  its  failure  to  redeem 
them  on  demand.  Most  charters  subsequently  granted  also 
contained  this  provision. 

Scarcity  of  specie  was  an  obstacle  to  the  enforcement  of 
this  provision  and  was  to  a  considerable  extent  respon- 
sible for  another  group  of  laws  regulative  of  the  denomi- 
nations of  bank-notes.  The  act  of  1792,  to  which  reference 
has  already  been  frequently  made,  prohibited  the  issue  of 
notes  below  the  denomination  of  $5.  The  charters  of 
the  Nantucket  and  Merrimac  banks  granted  three  years 
later,  however,  authorized  the  issue  of  notes  of  denomina- 
tions as  low  as  $2.  In  1805  the  law  was  modified  so  as 
to  permit  the  issue  of  $1,  $2  and  $3  notes  to  the  extent  of 
five  per  cent,  of  the  paid  up  capital.  In  1809  the  amount  of 
such  notes  permissible  was  raised  to  15  per  cent,  of  the  paid 
up  capital.  It  was  reduced  to  ten  per  cent,  in  18 12  and 
again  raised  in  1818  to  25  per  cent.,  at  which  point  it  re- 
mained so  long  as  state  banks  continued  to  issue  notes.  In 
the  absence  of  a  sufficient  amount  of  specie  in  circulation 
notes  of  low  denominations  were  needed  for  small  change, 
and  legislation  yielded  to  the  demand  thus  created,  but  it  is 
probable  that  the  satiation  of  the  popular  need  for  small 
change  by  such  notes  tended  to  prevent  the  importation  and 
maintenance  in  the  circulation  of  a  sufficient  amount  of 
specie.  Indeed  the  chief  argument  urged  in  favor  of  the 
prohibition  of  notes  of  low  denominations  is  the  inducement 
thereby  of  a  large  circulation  of  specie,  a  portion  of  which 
being  normally  kept  on  deposit  with  the  banks  enables  them 
to  redeem  their  notes  on  demand,  provided  the  volume  put 
out  be  kept  within  proper  limits. 


Banking  in  the  United  States  167 

Other  important  legislative  provisions  related  to  the  pub- 
licity of  bank  operations.  The  act  of  1792  required  that 
a  statement  of  the  banks'  affairs  be  made  to  the  Governor 
and  council  every  six  months;  that  of  1805  provided  that 
bank  statements  be  made  under  oath,  and  that  of  1806  men- 
tioned the  items  of  information  which  such  statements  must 
contain.  The  responsibility  of  directors  for  the  enforce- 
ment of  laws  in  the  cases  of  their  respective  banks  also 
received  the  attention  of  the  Massachusetts  legislators.  In 
the  charter  of  the  Massachusetts  bank,  as  amended  in 
1792,  they  were  held  personally  liable  for  the  debts  of 
the  bank  in  cases  of  violation  of  the  laws  unless  they  had 
been  absent  at  the  time,  or  had  protested  and  given  notice 
thereof  to  the  Governor  of  the  state.  The  general  bank 
act  of  1829  made  the  directors  liable  in  their  individual 
capacities  for  debts  of  the  bank  in  excess  of  the  limit  fixed 
by  law. 

These  and  a  large  number  of  other  legislative  provi- 
sions represent  the  efforts  of  the  legislature  to  throw  proper 
safeguards  about  the  banking  business.  Private  effort  was 
also  efficient  in  this  direction,  probably  more  so  than  public. 
Its  most  conspicuous  success  was  the  so-called  Suffolk 
system  for  the  clearing  and  redemption  of  bank-notes,  de- 
veloped by  the  Suffolk  bank  of  Boston  which  was  chartered 
in  18 18.  Up  to  that  time  the  notes  of  country  banks  had 
been  at  a  discount  in  Boston  varying  with  the  distance  of 
the  issuing  bank  and  the  difficulty  of  collection.  The  notes 
of  the  Boston  banks  passing  everywhere  at  par  were  kept 
out  of  circulation  by  these  depreciated  notes,  being  col- 
lected by  the  country  banks  and  returned  to  Boston  as  de- 
posits. To  such  an  extent  had  this  substitution  of  local 
for  Boston  notes  proceeded  that  in  1818  the  circulation  of 
the  Boston  banks  was  only  about  one-twenty-fifth  of  the 
total  for  New  England,  while  their  capital  was  more  than 


1 68  Money  and  Banking 

one-half  of  that  of  all  the  other  banks  in  the  same 
region. 

In  order  to  attract  to  itself  the  business  of  the  country 
banks  the  New  England  Bank  in  1813  offered  to  redeem 
country  bank-notes  at  a  discount  represented  by  the  actual 
cost  of  returning  them  to  the  place  of  issue  for  collection, 
a  charge  considerably  less  than  that  frequently  exacted. 
The  Suffolk  bank  entered  into  competition  for  this  business 
by  offering  to  redeem  at  par  the  notes  of  any  bank  that 
would  keep  with  it  a  fixed  deposit  of  five  thousand  dollars 
plus  a  sum  sufficient  to  redeem  such  of  its  notes  as  might 
be  presented.  This  plan  promising,  if  generally  adopted, 
to  maintain  the  circulation  of  the  country  bank-notes  at 
par,  interested  the  other  Boston  banks  as  well  as  the  Suf- 
folk, and  resulted  in  their  combining  with  it  to  force  reluc- 
tant banks  to  accept  the  Suffolk's  offer.  The  means  em- 
ployed was  the  contribution  of  a  fund  for  the  purchase  of 
the  notes  of  such  banks  and  for  their  speedy  return  to  the 
issuing  bank  for  collection.  Subsequently  the  forcing  pro- 
cess was  aided  by  legislation  in  Massachusetts  and  some  of 
the  other  New  England  states.* 

By  these  methods  and  their  own  interests  most  of  the 
banks  in  the  New  England  states  were  ultimately  induced 
to  accept  the  Suffolk's  offer  and  this  bank  thus  became  a 
clearing  agent  for  the  notes  of  the  entire  region.  After  a 
time  banks  in  Providence  and  Newport  aided  in  the  work. 
Under  this  system  the  bank-notes  of  New  England  were 
kept  at  par  and  redeemable  in  specie  on  demand  except 
during,  and  for  a  time  after,  the  crisis  of  1837.  Banks 
were  thus  compelled  to  keep  adequate  reserves  of  specie 
and  to  this  end  to  restrict  their  operations  in  various  direc- 
tions.    Withdrawal   from   the   system  became   a   sign   of 

*  See  an  act  of  the  Massachusetts  legislature  passed  in  1845,  provid- 
ing that  no  bank  should  pay  over  its  own  counter  any  notes  but  its  own. 


Banking  in  the  United  States  169 

weakness  and  exposed  a  bank  to  the  penalty  of  the  return 
of  its  notes  for  redemption  in  specie  at  frequent  intervals, 
and  sometimes  to  the  refusal  of  the  Suffolk  to  receive  its 
notes  under  any  conditions,  a  circumstance  which  threat- 
ened ruin,  since  it  deprived  the  notes  of  currency. 

The  Suffolk  system  remained  a  power  in  New  England 
to  the  time  of  the  establishment  of  the  national  banking 
system.  In  1855  the  Bank  of  Mutual  Redemption  estab- 
lished by  the  country  banks  was  chartered  as  a  competitor, 
and  after  a  time  attracted  the  greater  part  of  the  business, 
but  the  plan  for  clearing  and  redeeming  notes  established 
by  the  Suffolk,  persisted  as  long  as  the  state  banks  con- 
tinued to  issue  notes. 

In  New  York  State  attempts  to  safeguard  the  banking 
business  in  the  period  preceding  the  Civil  War  resulted  in 
some  contributions  to  the  art  well  worthy  of  description  in 
this  connection.  The  first  of  these  in  order  of  time  was 
the  so-called  safety-fund  system  for  the  mutual  insurance 
of  bank-notes.  In  1829  a  law  was  passed  requiring  every 
bank  which  thereafter  should  be  rechartered  or  newly  char- 
tered, to  contribute  three  per  cent,  of  its  capital,  one  and 
one-half  per  cent,  to  be  paid  annually,  to  a  fund  to  be  used 
for  the  payment  of  the  debts  of  failed  banks.  In  case  of  the 
reduction  of  the  fund  by  such  payments  it  was  to  be  replen- 
ished by  fresh  contributions  paid  at  the  same  rate  as  the 
original  ones.  The  principle  involved  in  this  legislation  is 
the  mutual  responsibility  of  each  bank  for  the  debts  of  the 
others  in  case  of  failure. 

A  free  field  for  the  operation  of  this  plan  was  left  open 
for  a  few  years  only.  In  1838  a  new  method  of  securing 
the  note-issues  of  banks  was  authorized  by  law,  a  method 
which  proved  more  popular  than  the  safety-fund  system 
and  ultimately  took  its  place.  According  to  this  law  banks 
were  permitted  to  secure  their  notes  by  the  deposit  with  a 


170  Money  and  Banking 

public  officer,  known  as  the  comptroller,  of  bonds  of  the 
United  States,  or  of  the  state  of  New  York  or  of  bonds  of 
other  states  approved  by  the  comptroller  and  equivalent  to 
five  per  cent,  bonds  of  the  state  of  New  York,  or  of  mort- 
gages on  improved,  productive  and  unincumbered  real  estate 
worth  double  the  amount  of  the  mortgage,  exclusive  of  the 
buildings  thereon.  In  case  a  bank  organized  under  this  system 
should  continue  in  default  of  the  redemption  of  its  notes 
for  a  period  of  ten  days,  the  comptroller  was  authorized 
to  sell  these  securities  left  on  deposit  and  apply  the  pro- 
ceeds to  such  redemption.  By  an  amendment  passed  in  1840 
bonds  of  other  states  were  removed  from  the  above  list, 
and  in  1863  the  privilege  of  depositing  real  estate  mort- 
gages was  taken  away. 

Another  important  provision  of  the  act  of  1838  extended 
this  privilege  of  issuing  circulating  notes  against  the  de- 
posit of  the  above  mentioned  securities  to  any  person  or 
association  of  persons  who  might  make  application  for  the 
same  or  conform  to  the  regulations  prescribed.  Hereto- 
fore the  privilege  of  banking  in  New  York  State  had  been 
conferred  by  special  charter  only  and  in  1804  and  18 18 
laws  were  passed  prohibiting  people  without  such  charters 
from  carrying  on  the  business  of  banking  in  the  state.  In 
the  granting  of  these  charters  political  favoritism,  bribery 
and  other  forms  of  corruption  and  fraud  had  played  a 
leading  role,  and  the  free  banking  principle  was  introduced 
as  the  remedy.  It  was  undoubtedly  efficient  in  this  direc- 
tion, but  its  immediate  effect  was  a  rapid  increase  in  the 
number  of  banking  institutions,  and  the  undermining  of  the 
safety-fund  system  by  the  removal  of  the  incentive  to  new 
banks  to  join  it  and  by  offering  inducements  to  those  al- 
ready operating  under  it  to  withdraw  and  reorganize  under 
the  new  law.  The  constitution  granted  in  1846  prohibited 
the  granting  of  special  bank  charters,  thus  compelling  all 


Banking  in  the  United  States  171 

institutions  to  be  established  in  the  future  to  organize  under 
the  free-banking  law. 

Experience  with  the  safety-fund  system  was  thus  con- 
fined to  the  new  banks  organized  and  the  old  ones  rechar- 
tered  in  the  period  1829  to  1838,  and  after  that  date  to  such 
of  these  banks  as  did  not  reorganize  under  the  free-bank- 
ing law.  The  crisis  of  1837  was  fatal  to  banks  all  over  the 
country.  Two  operating  under  the  safety-fund  system 
failed  in  that  year,  and  two  others  soon  after.  During  the 
years  1840  to  1842  eleven  more  failed,  the  payment  of 
the  debts  of  the  first  three  of  which  exhausted  the  fund 
accumulated  in  accordance  with  the  act  of  1829.  The  num- 
ber of  banks  operating  under  the  system  was  so  small  in 
comparison  to  the  number  of  failures  that  the  replen- 
ishment of  the  fund  was  too  slow  to  enable  the  comptroller 
to  meet  the  demands  made  upon  it.  The  amendment  of 
the  act  in  1842  providing  that  after  the  payment  of  the 
obligations  already  incurred,  notes  should  be  made  a  first 
lien  on  the  fund,  and  a  provision  in  the  constitution  of 
1846  making  note-holders  preferred  creditors  of  all  failed 
banks,  came  too  late  to  give  much  relief. 

The  results  of  the  operation  of  the  free-banking  act 
were  far  from  satisfactory  during  the  early  years.  There 
were  many  failures  of  banks  organized  under  it,  and  the 
proceeds  of  the  sales  of  securities  lodged  with  the  comp- 
troller were  often  insufficient  for  the  redemption  of  the 
notes  at  par.*  Many  institutions  organized  under  it  were 
not  banks  in  any  proper  sense  since  they  issued  notes  only 
and  offered  no  loan,  deposit  or  exchange  facilities  to  the 

*In  the  pamphlet  already  referred  to  Mr.  Root  states  that  26  of 
these  banks  had  failed  previous  to  1844,  and  that  their  circulation  had 
been  redeemed  at  the  average  rate  of  76  cents  on  the  dollar. 

The  Superintendent  of  Banks  in  1854  stated  that  bonds  and  mort- 
gages sold  under  the  provisions  of  the  free-banking  act  had  not 
realized  more  than  75  per  cent,  of  their  par  value. 


1/2  Money  and  Banking 

public.  For  example,  some  persons  in  New  York  City  and 
outside  of  the  state  purchased  on  credit  the  requisite  securi- 
ties, deposited  them  with  the  comptroller  and  used  the  notes 
issued  to  pay  for  them,  redeeming  the  notes  subsequently 
at  a  discount  of  one-half  per  cent.  This  proceeding  was 
made  possible  by  a  law  passed  in  1840  requiring  all  country 
banks  to  redeem  their  notes  in  New  York  City  or  Albany, 
but  permitting  such  redemption  at  a  discount  not  to  exceed 
one-half  per  cent.  The  persons  above  mentioned,  therefore, 
had  simply  to  adopt  the  device  of  dating  their  notes  at  some 
interior  point  to  enable  them  to  work  their  profitable  scheme. 
In  order  to  prevent  this  practice  a  law  was  passed  in  1844 
prohibiting  persons  from  transacting  the  business  of  bank- 
ing in  any  place  except  their  residences. 

In  New  York  as  in  Massachusetts  bank  failures,  fraudu- 
lent practices  under  the  cover  of  law,  and  actual  violations 
of  law  suggested  amendments  and  new  legislation.  The 
new  state  constitution  of  1846  contained  provisions  mak- 
ing stockholders  liable  for  the  debts  of  their  banks  to  the 
amount  of  their  capital  stock  in  addition  to  what  had  al- 
ready been  paid  in,  making  note-holders  preferred  creditors 
in  cases  of  insolvency,  requiring  the  registration  of  circu- 
lating notes,  and  prohibiting  the  passage  of  a  law  author- 
izing the  suspension  of  specie  payments.  A  law  was  passed 
in  1848  requiring  all  banking  associations  to  receive  de- 
posits and  to  make  loans  as  well  as  to  issue  notes.  Under 
the  operation  of  these  and  other  laws,  and  as  a  result  of 
experience  in  administering  the  laws  and  in  detecting  fraud- 
ulent practices,  conditions  gradually  improved  and  became 
fairly  satisfactory  before  the  passage  of  the  national  bank- 
ing act  in  1863.  The  number  of  failures  decreased  and  the 
losses  from  such  failures  as  did  occur  were  greatly  reduced. 

A  comparison  between  the  safety-fund  and  bond-security 
systems  on  the  basis  of  New  York's  experience  does  not 


Banking  in  the  United  States  173 

furnish  conclusive  evidence  for  or  against  either  one.  The 
safety-fund  system  was  not  without  competitors  long 
enough  to  enable  its  merits  to  be  fully  demonstrated  and  it 
was  handicapped  by  the  fact  that  the  amount  of  the  fund 
was  made  proportional  to  the  capital  instead  of  to  the  cir- 
culation of  the  banks  and  by  the  fact  that  all  the  debts  of 
an  insolvent  bank  instead  of  simply  its  outstanding  notes 
were  paid  out  of  the  fund  in  case  the  liabilities  were  greater 
than  the  assets.  In  spite  of  these  drawbacks,  however,  the 
security  to  note-holders  under  this  system  was  greater  than 
that  rendered  by  the  bond-deposit  system  during  its  early 
years.  As  afterward  amended,  the  latter  system  left  little 
to  be  desired  in  this  direction.  This  same  doubtless  could 
have  been  said  of  the  safety-fund  system  had  it  been  given 
a  trial  under  the  conditions  suggested  above.  On  account 
of  insufficient  data  no  comparison  of  the  two  systems  on 
the  basis  of  costs  can  be  made.  From  the  point  of  view 
of  elasticity  the  advantage  is  with  the  safety-fund  system, 
the  expansion  and  contraction  of  note-issues  under  this 
system  corresponding  with  the  expansion  and  contraction 
of  business,  while  under  the  other  there  is  no  connection 
between  the  two.* 

The  free-banking  system  was  popular  in  the  west.  It 
was  introduced  into  Ohio  in  1845,  into  Illinois  in  185 1, 
into  Indiana  in  1852  and  into  Wisconsin  in  1853.  It  did 
not  flourish  in  Ohio  on  account  of  the  competition  of  a 
strong  bank  already  in  successful  possession  of  the  field, 
but  in  the  other  states  it  was  given  an  extended  trial.  The 
results,  in  the  period  before  and  during  the  Civil  War.  were 
far  from  satisfactory.  In  Illinois  and  Indiana  this  system 
was  accompanied  by  speculation  and  fraud  on  a  large  scale. 
A  large  number  of  the  banks  authorized  under  the  acts 

♦  See  Mr.  Root's  pamphlet  for  a  comparison  of  the  results  of  the  two 
systems. 


174  Money  and  Banking 

passed  in  these  states  were  note-issuing  institutions  and 
nothing  more,  the  proprietors  profiting  from  the  interest 
paid  on  the  bonds  deposited  with  the  state,  said  bonds  hav- 
ing been  directly  or  indirectly  purchased  with  the  notes 
for  the  security  of  which  they  were  deposited.     The  free- 
banking  laws  in  these  states  authorized  the  issue  of  notes 
by  any  group  of  persons  after  the  deposit  with  a  desig- 
nated state  officer  of  certain  specified  securities.     Provided 
the  securities  could  be  purchased  from  a  broker  on  time, 
they  could  be  deposited  as  provided  by  law,  the  notes  se- 
cured and  the  broker  paid  with  the  proceeds.    If  the  broker, 
as  was  likely  to  be  the  case,  did  business  in  New  York, 
Boston,  Philadelphia  or  some  other  distant  place,  the  notes 
would  enter  into  circulation  at  a  point  far  distant  from 
the  home  of  the  issuing  bank,  and  would  not  be  likely  to 
return  to  it  for  redemption  until  after  the  lapse  of  a  con- 
siderable portion  of  time.    When  they  did  return,  the  bank 
either  went  to  the  wall  without  a  struggle  or  redemption 
was  evaded  by  the  location  of  the  office  of  the  bank  in  some 
inaccessible  place,  or  by  other  devices.     The  final  result 
was  the  sale  of  the  securities  by  the  state  official  charged 
with  that  duty,  usually  at  a  price  considerably  below  the 
face  value  of  the  notes  issued,  or  their  direct  exchange  for 
the  notes  which  were  usually  in  the  hands  of  brokers  who 
had  purchased  them  at  a  heavy  discount.     In  any  case  the 
innocent  public  was  fleeced  to  the  advantage  of  the  brokers 
and  bank  proprietors. 

In  addition  to  the  fraudulent  practices  perpetrated  under 
cover  of  these  laws,  difficulty  was  often  experienced  on 
account  of  the  overvaluation  of  the  securities  deposited  and 
fluctuations  in  their  value.  When  a  bona  fide  bank  failed, 
the  sale  of  the  securities  held  often  did  not  realize  a  sum 
sufficient  for  the  redemption  of  the  notes  that  had  been 
issued  against  them.    This  difficulty  was  generally  experi- 


Banking  in  the  United  States  175 

enced  at  the  time  of  the  outbreak  of  the  Civil  War  the 
bonds  of  the  southern  states  having  been  deposited  as  se- 
curity for  note-issues  in  many  of  the  states  operating  under 
this  system,  notably  in  Wisconsin. 

These  and  other  defects  of  the  free-banking  system,  re- 
vealed  by  early  operations  under  it,  especially  in  the  West, 
were  due  to  defects  in  the  laws  themselves  and  in  their  ad- 
ministration, and  were  capable  of  correction.  The  principle 
of  free-banking  does  not  necessarily  involve  the  bond  or 
special  security  system  of  note-issue  and  even  that  system 
was  capable  of  great  improvement  as  the  experience  of 
New  York  State  and  later  of  the  United  States  shows.  In 
frontier  communities  like  Indiana,  Illinois  and  Wisconsin 
in  the  fifties,  any  system  under  state  control  was  likely  to 
fall  into  bad  hands,  to  be  badly  administered  and  conse- 
quently abused,  the  administration  of  laws  however  good 
in  such  states  being  almost  necessarily  lax,  and  the  art  of 
law-making  necessarily  imperfect.  We  must  also  remem- 
ber that  the  principles  of  sound  commercial  banking  were 
not  well  understood  by  the  bankers  and  legislators  of  those 
days.  They  had  to  be  learned  in  the  hard  school  of  ex- 
perience. 

Previous  to  the  Civil  War  some  thirteen  states  had  ex- 
perience with  banks  owned  and  operated  in  whole  or  in 
part  by  their  respective  governments.  The  history  of  these 
banks  emphasizes  the  truth  just  suggested  that  our  unfor- 
tunate early  experiences  with  banking  institutions  were  due 
more  to  ignorance  of  banking  principles,  bad  administra- 
tion of  state  laws  and  regulations  devised  by  the  banks 
themselves  than  to  defects  in  the  systems  tried  or  in  the 
laws  designed  to  regulate  and  safeguard  them.  The  major- 
ity of  these  state-owned  and  state-managed  banks  were 
bad  failures,  but  a  few  were  great  successes.  Notable  among 
the  former  were  the  Mississippi  Union  Bank  and  the  State 


176  Money  and  Banking 

Bank  of  Alabama,  and  among  the  latter  the  state  banks  of 
Indiana  and  South  Carolina.  These  banks  were  to  a  con- 
siderable extent  modelled  after  the  United  States  banks, 
and  in  the  methods  of  their  organization,  and  in  the  laws 
by  which  they  were  to  be  controlled,  differed  considerably, 
but  not  enough  to  account  for  the  wide  differences  in  their 
fates.  These  differences  were  chiefly  due  to  the  men  into 
whose  hands  their  administration  and  control  fell.  The 
state  banks  of  Indiana  and  South  Carolina  were  well  ad- 
ministered by  honest  and  capable  men,  the  others  were  badly, 
and  in  some  cases,  dishonestly  administered. 

8.  Origin  and  development  of  the  national  banking  sys- 
tem.— The  outbreak  of  our  Civil  War  in  1861  was  respon- 
sible for  the  next  important  step  in  the  development  of 
banking  institutions  in  this  country,  namely,  the  establish- 
ment of  the  national  banking  system.  Since  1836  the  state 
banks  had  had  the  field  entirely  to  themselves  and  since 
1846  the  federal  government  had  managed  its  own  finances 
through  the  independent  treasury  system,  using  only  gold 
and  silver  coin  in  payments  and  receiving  its  revenues  in 
that  form  only.  One  of  the  early  consequences  of  the  out- 
break of  hostilities  was  the  partial  disorganization  of  the 
exchange  system  of  the  country  by  the  severing  of  com- 
mercial, including  banking,  relations  between  the  northern 
and  southern  states  and  a  little  later  by  the  suspension  of 
specie  payments  by  the  banks  of  most  of  the  states.  This 
was  followed  by  a  rapid  expansien  of  note  issues  and  their 
substitution  for  coin  in  the  general  circulation. 

At  this  time  the  federal  treasury  was  confronted  by  a 
serious  problem.  Its  expenditures,  enormously  increased 
by  the  war,  greatly  exceeded  its  revenues  from  all  sources 
and  no  adequate  plan  for  meeting  past  deficits  and  provid- 
ing for  future  needs,  either  through  borrowing  or  taxa- 
tion or  a  combination  of  both,  had  been  devised  and  adopted 


Banking  in  the  United  States  177 

by  Congress.  In  his  annual  report  of  December,  1861,  Sec- 
retary Chase  suggested  that  a  market  for  government  bonds 
might  be  created  by  permitting  the  issue  of  bank-notes 
on  the  security  of  such  bonds  and  an  adequate  provision  of 
specie.  His  suggestion  was  incorporated  in  a  bill  proposed 
by  Mr.  Spaulding,  chairman  of  a  sub-committee  of  the 
House  Committee  on  Ways  and  Means,  but  dijfferences  of 
opinion  regarding  the  wisdom  of  the  measure  and  its  in- 
adequacy to  meet  the  immediate  and  pressing  needs  of  the  ^ 
Treasury,  led  to  its  postponement  and  to  the  passage  on 
Feb.  25,  1862,  of  an  act  authorizing  the  issue  of  $150,000,- 
000  of  legal-tender  notes  in  denominations  suitable  for  cir- 
culation as  money.  This  act  was  followed  July  11,  1862, 
Jan.  17,  and  March  3,  1863,  by  others  authorizing  an  in- 
crease of  this  class  of  notes  to  $450,000,000  in  addition  to 
the  fractional  currency  issued  to  supply  the  demand  for 
small  change.  These  notes  speedily  depreciated,  became  a 
secondary  standard  of  value,  and  took  the  place  of  coin  in 
bank  reserves  and  as  redemption  material  for  bank-notes. 
The  latter,  of  course,  circulated  at  the  same  discount  as  the 
government  notes  and  fluctuated  in  value  in  correspondence 
with  them. 

The  bill  proposed  by  Mr.  Spaulding  and  embodying  the 
suggestion  of  Secretary  Chase  was  again  brought  before 
Congress  in  the  early  part  of  1863,  and  enacted  into  law 
Feb.  25th.  It  authorized  the  organization  of  banking  as- 
sociations with  a  minimum  capital  of  $50,000,  of  which  not 
less  than  one-third  should  be  invested  in  government  bonds. 
Said  bonds,  when  deposited  with  an  officer  to  be  known  as 
the  Comptroller  of  the  Currency,  authorized  the  association 
to  secure  circulating  notes  to  90  per  cent,  of  their  face,  but 
not  to  exceed  90  per  cent,  of  their  market,  value.  The 
total  amount  of  such  notes  authorized  to  be  issued  in  the 
entire  country  was  fixed  at  $300,000,000  to  be  distributed 


178  Money  and  Banking 

among  the  states  and  territories,  one-half  according  to 
population,  and  one-half  having  due  regard  to  existing 
bank  capital  and  resources.  The  maximum  amount  to  be! 
issued  by  any  association  was  limited  to  the  amount  of  its 
paid  up  capital  stock.  The  notes  when  issued  were  to  be 
receivable  for  all  government  dues  except  duties  on  imports 
and  for  all  government  obligations  except  interest  on  the 
public  debt  and  in  redemption  of  the  national  currency,  and 
were  to  be  accepted  at  par  by  all  banks  in  the  system.  Each 
bank  was  required  to  redeem  its  circulation  on  demand 
in  lawful  money,  and  in  case  of  default,  the  bonds  on 
deposit  were  to  be  forfeited  to  the  United  States  and  the 
notes  paid  by  the  Treasurer.  These  associations  were 
authorized  to  transact  the  various  kinds  of  business  belong- 
ing to  a  commercial  bank  under  the  following  limitations : 
They  were  not  to  hold  real  estate  except  to  the  extent  neces- 
sary for  the  accommodation  of  their  business  or  such  as  may 
have  come  into  their  possession  in  satisfaction  of  debts 
owed  them;  they  were  not  to  loan  to  any  one  association 
or  person  an  amount  to  exceed  one-tenth  of  their  capital 
stock  actually  paid  in,  exclusive  of  liabilities  on  bills  of  ex- 
change and  with  such  liabilities  not  to  exceed  one-fifth  of 
their  capital  stock;  they  were  not  to  loan  on  security  of 
their  own  stock;  and  they  were  not  to  be  indebted  to  an 
amount  exceeding  their  capital  stock  actually  paid  in  and 
unincumbered,  except  on  account  of  notes  in  circulation, 
deposits,  bills  of  exchange  or  drafts  drawn  against  moneys 
actually  on  deposit  to  their  credit  and  liabilities  to  stock- 
holders for  dividends  and  reserved  profits.  They  were  re- 
quired to  keep  a  cash  reserve  of  not  less  than  25  per  cent,  of 
their  deposits  and  outstanding  notes,  three-fifths  of  which 
might  be  deposited  with  associations  in  nine  principal  cities 
named  in  the  act.  At  the  discretion  of  the  Secretary  of  the 
Treasury  they  might  be  designated  depositories  of  public 


Banking  in  the  United  States  179 

money,  except  receipts  from  customs.  They  were  required 
to  furnish  the  Comptroller  with  quarterly  reports  of  their 
condition  and  to  submit  to  inspection  by  persons  appointed 
by  him.  Provision  was  also  made  for  the  conversion  of  state 
banks  into  national  associations. 

During  the  first  two  years  of  its  history  the  progress  of 
the  system  was  slow,  owing  chiefly  to  defects  in  the  law 
and  to  the  disinclination  of  state  banks  to  enter  it.  The 
first  difficulty  was  partially  removed  by  an  act  approved 
June  3,  1864,  which  contained  the  following  new  provi- 
sions: A  classification  of  national  banks  into  three  groups 
according  to  their  location  in  New  York  City,  in  any  one 
of  nineteen  of  the  principal  cities  of  the  country  mentioned 
in  the  act,  generally  known  thereafter  as  reserve  cities,  or  in 
other  towns.  Banks  in  New  York  City  and  reserve  cities 
were  to  keep  a  reserve  of  25  per  cent,  of  their  deposits  and 
note-issues,  one-half  of  which,  in  case  of  the  reserve  cities, 
might  be  kept  on  deposit  in  the  city  of  New  York.  For 
other  banks  the  reserve  was  fixed  at  15  per  cent,  of  deposits 
and  note-issues,  of  which  three-fifths  might  be  kept  on 
deposit  in  New  York  City  or  in  the  reserve  cities.  These 
banks  were  also  required  to  select  an  association  in  New 
York  City  or  in  some  one  of  the  reserve  cities  through  which 
to  redeem  their  notes  at  par,  the  previous  act  requiring  only 
that  the  banks  should  redeem  their  notes  over  their  own 
counters.  Until  specie  payments  should  be  resumed  this 
act  permitted  not  more  than  one-sixth  of  the  notes  issued 
to  be  of  denominations  below  $5,  raised  the  minimum  capi- 
tal requirement  to  $50,000  in  towns  the  population  of  which 
does  not  exceed  six  thousand,  to  $100,000  in  towns  of  from 
six  to  fifty  thousand  inhabitants,  and  to  $200,000  in  towns 
of  over  fifty  thousand  inhabitants,  provided  for  the  taxa- 
tion of  shares  by  state  authority,  raised  the  minimum 
amount  of  bonds  to  be  deposited  with  the  Comptroller  to 


i8o  Money  and  Banking 

$30,000,  provided  for  the  accumulation  of  a  surplus  equal 
to  20  per  cent,  of  the  capital  stock,  required  security  for  gov- 
ernment deposits  in  the  form  of  the  deposit  with  the 
Comptroller  of  government  bonds  and  othcrzvise,  modified 
the  clause  relative  to  the  permissable  liability  of  a 
single  firm  or  individual  to  a  bank  so  as  not  to  permit  such 
liability  to  exceed  one-tenth  of  the  capital  stock  actually  paid 
in,  bills  of  exchange  drawn  against  actual  values  and  com- 
mercial paper  actually  owned  and  discounted  not  to  be  con- 
sidered as  money  borrowed,  and  made  more  complete 
provision  than  the  previous  act  for  the  conversion  of  state 
into  national  institutions. 

All  things  considered,  the  reluctance  of  the  state  banks 
to  enter  the  system  was  natural  and  it  was  not  entirely  over- 
come until  the  war  closed  and  pressure  was  put  upon  them 
in  the  form  of  a  tax  on  their  note-issues.  This  tax,  amount- 
ing to  ten  per  cent,  on  their  circulation,  was  imposed  by  an 
act  passed  Mar.  3,  1865.  Though  it  did  not  go  into  effect 
until  Aug.  I,  1866  its  influence  was  immediate.  To  Nov. 
25,  1864  only  one  hundred  sixty-eight  state  banks  had 
entered  the  system,  but  during  the  year  1865  seven  hundred 
thirty-one  entered,  and  by  the  end  of  1868  only  two  hundred 
forty-four  state  banks  still  remained  in  existence. 

Until  the  passage  of  the  act  for  the  resumption  of  specie 
payments  Jan.  14,  1875  the  limitation  of  the  total  circula-' 
lation  and  its  distribution  among  the  states  were  subjects 
of  agitation  and  legislation.  By  the  end  of  the  year  1868 
the  limit  of  $300,000,000  fixed  in  the  acts  of  1863  and  1864 
had  been  nearly  reached,  *  and  the  states  of  New  York, 
Massachusetts,  Connecticut  and  Rhode  Island  had  more 
than  their  legal  share.     To  remedy  these  difficulties  and  to 

*  According  to  the  reports  made  to  the  comptroller  the  total  circula- 
tion amounted  to  $280,129,558  Oct.  i,  1866;  to  $291,093,294  Jan.  i,  1867; 
to  $294,377,390  Jan.  I,  1868,  and  to  $295,769,489  Oct.  i,  1868. 


Banking  in  the  United  States  i8i 

provide  for  the  future  expansion  of  the  system,  an  act  was 
passed  July  12,  1870,  increasing  the  Hmit  for  the  cou^ntry  as 
a  whole  from  three  hundred  to  three  hundred  fifty-four 
million  dollars  and  providing  for  the  withdrawal  of  $25,- 
000,000  from  banks  located  in  states  having  more  than  their 
proportion  for  redistribution  among  those  in  states  having 
less. 

The  execution  of  this  act  was  rendered  difficult,  indeed 
almost  impossible,  by  the  imperfection  of  the  machinery 
for  the  retirement  of  outstanding  notes.  According  to  the 
laws  at  the  time  in  force  such  notes  had  to  be  collected  and 
returned  to  the  issuing  bank  or  to  its  redemption  agent,  but 
there  was  no  easy  and  speedy  means  of  accomplishing  this. 
An  act  passed  June  20,  1874,  supplied  a  remedy  and  modified 
the  law  in  other  important  particulars.  It  made  the  Treas- 
urer of  the  United  States  the  redemption  agent  for  all  the 
banks  and  to  this  end  required  the  deposit  with  him  of  a  fund 
equal  to  five  per  cent,  of  the  outstanding  issues,  which  fund, 
however, -could  be  counted  as  a  part  of  the  legal  reserve. 
It  repealed  the  provision  requiring  a  reserve  to  be  kept 
against  circulation,  and  increased  to  $55,000,000  the 
amount  to  be  withdrawn  from  banks  in  states  having  an 
excess.  In  order  still  further  to  facilitate  the  retirement 
of  circulation,  it  provided  that  banks  might  deposit  lawful 
money  with  the  Treasurer  of  the  United  States  in  exchange 
for  an  equal  amount  of  bonds  held,  the  notes  to  be  subse- 
quently cancelled  as  they  came  into  the  hands  of  the  Treas- 
urer, and  permitted  any  bank  to  reduce  its  holdings  of 
government  bonds  on  deposit  with  the  Comptroller  to 
$50,000. 

The  act  providing  for  the  resumption  of  specie  payments, 
passed  Jan.  14,  1875,  removed  the  limitation  on  the  total 
amount  of  the  circulation  and  thus  put  an  end  to  the  dif- 
ficulties arising  therefrom,  and  from  the  attempts  properly 


1 82  Money  and  Banking 

to  distribute  it  among  the  states.  The  danger  of  currency 
inflation  which  had  been  the  cause  of  this  Hmitation  was 
removed  by  the  provision  that  for  every  one  hundred  dol- 
lars of  new  bank-notes  issued  eighty  dollars  of  the  United 
States  notes  should  be  retired  until  the  total  amount  out- 
standing should  be  reduced  to  $300,000,000,  and  by  the 
requirement  that  on  and  after  Jan.  i,  1879,  said  United 
States  notes  should  be  paid  in  coin  on  demand. 

In  the  period  preceding  the  resumption  of  specie  pay- 
ments United  States  notes  and  bank-notes  were  rival  forms 
of  currency  in  the  sense  that  the  advocates  of  one  were  us- 
ually opponents  of  the  other.  During  the  Civil  War  the 
United  States  notes  were  generally  regarded  as  a  temporary 
financial  expedient  to  be  dispensed  with  at  the  earliest  pos- 
sible moment  and,  when  the  national  banking  system  was 
established  in  1863,  it  was  expected  that  the  notes  issued 
by  these  associations  would  constitute  the  chief  paper  ele- 
ment in  our  hand-to-hand  currency.  In  accordance  with 
this  idea,  an  act  passed  in  1866  authorized  the  gradual  re- 
tirement of  the  United  States  notes,  but  this  policy  was 
checked  two  years  later  by  another  act  which  deprived  the 
Secretary  of  the  Treasury  of  the  authority  to  retire  any 
more  notes.  From  that  time  until  Jan.  i,  1879,  a  continuous 
warfare  was  waged  in  Congress  between  the  advocates 
and  the  opponents  of  the  resumption  of  specie  payments, 
the  outcome  of  which  was  the  compromise  embodied  in  the 
resumption  act  of  1875  by  which  national  bank-notes  were 
to  be  gradually  substituted  for  the  excess  of  United  States 
notes  in  circulation  over  $300,000,000.  An  act  passed 
May  31,  1878  modified  the  compromise  by  forbidding  the 
further  substitution  of  bank-notes  for  United  States  notes 
and  by  providing  that  the  United  States  notes  still  remain- 
ing in  circulation,  amounting  at  the  time  to  $346,681,016, 
should  not  be  returned,  cancelled  or  destroyed,  but  reissued 
and  kept  in  circulation. 


Banking  in  the  United  States  183 

During  this  same  period,  1875-1879,  the  circulation  of 
the  national  banks  decreased  from  $354,128,250  to  $323,- 
791,674*  on  account  of  the  profit  to  be  derived  from  the 
withdrawal  of  bonds  on  deposit  with  the  Comptroller  and 
their  sale  on  the  open  market  at  the  premium  then  ruling. 
For  the  same  reason  it  subsequently  decreased  to  the  low 
minimum  of  $123,000,000  in  Oct.,  1890,  varying  up  and 
down  between  these  dates  and  subsequently  in  accordance 
with  the  price  of  government  bonds.  The  bond  security 
feature  of  the  national  banking  act,  therefore,  quite  as  much 
as  the  retention  of  the  United  States  notes  has  contributed 
to  the  defeat  of  one  of  its  original  purposes,  namely,  the 
supply  of  the  country  with  an  adequate  note  circulation. 
Such  a  circulation  must  be  elastic,  varying  in  magnitude 
in  correspondence  with  the  current  needs  of  commerce.  A 
bond-secured  circulation  like  ours  cannot  thus  vary,  since 
there  is  no  connection  between  the  volume  of  currency 
needed  and  the  profitableness  of  bank  investments  in  gov- 
ernment bonds.  On  the  contrary  it  becomes  a  disturbing 
element  since  its  fluctuations  in  volume  are  not  infrequently 
opposed  to  the  interests  of  commerce,  increasing  when  it 
ought  to  decrease  and  vice  versa,  and,  like  the  United 
States  notes,  taking  the  place  in  the  general  circulation  of 
coin  much  needed  as  a  basis  for  the  credit  system  of  the 
country. 

In  spite  of  the  failure  of  the  system  of  note-issues  im- 
posed upon  the  country  by  the  national  banking  act,  the 
banking  system  which  it  inaugurated,  all  things  considered, 
has  been  a  success  and  a  great  improvement  over  anything 
the  country  had  experienced  before.  One  of  its  chief 
merits  has  been  uniformity.  National  banks  wherever 
located,  and  they  have  been  established  in  every  state  of 
the  Union,  and  in  small  as  well  as  in  large  towns,  are  sub- 
♦Comptroller's  Report  for  1879,  p.  xiv. 


184  Money  and  Banking 

ject  to  the  same  obligations  administered  from  a  single  cen- 
ter, the  office  of  the  Comptroller  of  the  Currency.  Ac- 
cumulating experience  has  rendered  this  administration 
more  and  more  efficient  and  gives  promise  of  a  closer  ap- 
proximation to  perfection  in  the  future.  Defects  in  the  act 
revealed  by  such  experience  have  from  time  to  time  been 
remedied.  Besides  the  amendments  already  described  should 
be  mentioned:  The  act  of  March  3,  1869,  providing  for  five 
reports  annually  at  dates  to  be  fixed  by  the  Comptroller 
instead  of  the  quarterly  reports  previously  required;  the 
act  of  July  12,  1882,  reducing  the  minimum  amount  of 
bonds  to  be  deposited  by  banks  having  a  capital  of  $150,000 
or  less  from  one-third  to  one-fourth  of  their  capital ;  the  act 
of  March  3,  1887,  providing  for  an  increase  in  the  number 
of  reserve  and  central  reserve  cities ;  and  the  act  of  March 
14,  1900,  which  authorized  the  establishment  of  banks  with 
a  minimum  capital  of  $25,000  in  towns  of  three  thousand 
inhabitants  or  less,  increased  the  amount  of  notes  to  be 
issued  against  the  bonds  deposited  from  90  per  cent,  to  100 
per  cent,  of  their  par  value  and  diminished  the  tax  on  cir- 
culation from  one  per  cent,  to  one-half  per  cent,  on  condition 
that  the  new  two  per  cent,  bonds  authorized  by  the  act  should 
be  deposited  as  security  for  circulation  in  lieu  of  the  other 
issues  at  the  time  extant. 

Another  feature  of  the  system,  regarded  by  some  as  a 
merit  and  by  others  as  a  defect,  is  the  centralization  which 
it  has  permitted,  and  to  some  extent,  promoted.  The  law 
permits  country  banks  to  keep  three-fifths  of  their  reserves 
on  deposit  in  reserve  cities  and  reserve  city  banks  to  keep 
one-half  of  theirs  on  deposit  in  the  central  reserve  cities  of 
which  at  present  there  are  three,  New  York,  Chicago  and  St. 
Louis.  Banks  have  generally  availed  themselves  of  this 
privilege  with  the  result  that  certain  national  banks  in 
New  York  City  hold  a  considerable  fraction  of  the  reserves 


Banking  in  the  United  States  185 

for  the  entire  country.  These  reserve-holding  banks  act 
also  as  correspondents  for  the  institutions  for  which  they 
hold  reserves  and  in  this  capacity  receive  on  deposit  funds 
needed  for  the  conduct  of  their  out-of-town  exchanges  and 
their  surplus  funds,  that  is,  funds  for  which  profitable  em- 
ployment cannot  be  found  at  home.  The  latter  practice 
is  due  primarily  to  the  importance  of  New  York  City  as  a 
commercial  and  financial  center,  but  it  has  been  facilitated 
and  encouraged  by  the  features  of  the  national  banking  act 
just  described. 

The  administration  of  these  funds  is  an  important  trust. 
They  are  subject  to  draft  from  the  banks  to  which  they|, 
belong  and  are  certain  to  be  diminished  whenever  the  need*'^ 
for  funds  outside  of  New  York  City  is  increasing  and  to 
be  increased  under  opposite  conditions.  They  should,  there- 
fore, be  so  employed  as  always  to  be  available  when  needed 
and  the  nature  of  their  employment  should  be  such  that  their 
withdrawal  will  not  seriously  affect  important  interests. 

The  development  of  deposit-banking  has  been  the  chief 
factor  in  the  success  of  the  national  system.  It  has  ren- 
dered steady  growth  possible  in  spite  of  the  erratic  and 
clumsy  operation  of  the  note-issuing  function.  This  devel- 
opment has  been  the  result  of  the  growing  wealth  of  the 
country  and  of  the  ingenuity  of  American  bankers  in  devis- 
ing such  ways  and  means  of  employing  deposits  in  the  ex- 
changes of  the  country  as  for  most  purposes  have  rendered 
them  more  economical,  safe  and  convenient  than  any  other 
form  of  currency.  On  account  of  this  development  the  im- 
portance of  national  banks  as  purely  commercial  institutions 
operating  on  the  basis  of  deposits  has  steadily  increased 
relatively  to  their  importance  as  note-issuing  centers.  If 
their  right  to  issue  notes  were  taken  away,  they  would  not 
only  survive  but  prosper,  probably  quite  as  much  now. 

9.  State  banking  since  the  Civil  War. — The  development 


1 86  Money  and  Banking 

of  deposit  banking  was  also  primarily  responsible  for  the 
revival  of  the  state  banks.  After  1868  they  increased  in 
numbers  steadily  but  slowly  to  1886,  since  which  time  their 
growth  has  been  rapid.  As  banks  of  deposit  they  again 
became  competitors  of  the  national  institutions.  In  this 
competition  they  have  usually  had  the  advantage  of  a 
smaller  capital  requirement,  the  privilege  within  limits  of 
loaning  upon  real  estate  security  and  more  liberal  laws 
regarding  the  magnitude  of  loans  permitted  to  a  single  in- 
dividual or  firm.  * 

On  the  part  of  the  national  banks  the  profits  from  note- 
issues  and  the  prestige  of  the  national  system  have  been 
advantages.  The  balance  of  advantage  in  favor  of  the  one 
system  or  the  other  has  varied  in  different  localities  and  at 
different  times. 

The  following  table  indicating  the  number  of  national 
and  state  banks  which  responded  to  the  call  of  the  National 
Monetary  Commission  for  statements  of  their  condition  on 
April  28,  1909,  represents  with  a  considerable  degree  of 
accuracy  the  distribution  of  the  two  classes  of  institutions 
throughout  the  Union  at  that  date : 

*  Several  of  the  states  do  not  fix  any  minimum  capital  requirement, 
and  of  those  which  do  $10,000  for  banks  in  small  towns  is  the  most 
common.  Regarding  investments  on  real  estate  security  the  state 
banking  laws  are  very  liberal,  most  of  them  (38)  imposing  no  restric- 
tions whatever.  Four  allow  loans  on  first  mortgage  security  only;  two 
limit  the  amount  of  such  loans  to  fifty  per  cent,  of  the  capital  and  de- 
posits ;  and  others  restrict  such  loans  to  the  home  state  or  limit  their 
amount  to  a  certain  percentage  of  the  value  of  the  property  mortgaged. 
Regarding  restriction  of  loans  to  a  single  individual  or  corporation, 
sixteen  states  have  no  provision  whatever  and  twenty-five  have  pro- 
visions that  are  more  liberal  than  those  of  the  national  banking  act. 
For  details  see  Welldon's  Digest  of  State  Banking  Statutes  included 
in  the  Reports  of  the  National  Monetary  Commission. 


Banking  in  the  United  States 


187 


State 


Maine 

New  Hampshire.  . 

Vermont 

Massachusetts.  . .  . 
Rhode  Island.  .  .  . 

Connecticut 

New  York 

New  Jersey 

Pennsylvania.  .  .  . 

Delaware 

Maryland 

Dist.  of  Columbia. 

Virginia 

West  Virginia .... 
North  Carolina.  .  . 
South  Carolina.  .  . 

Georgia 

Florida 

Alabama 

Mississippi 

Louisiana 

Texas 

Arkansas 

Kentucky 

Tennessee 

Ohio 

Indiana 


No.  of 
Nat.  Bks, 


77 

57 

50 
196 

22 

81 

430 
182 
790 

27 
102 

1 1 
114 

94 
70 

32 
102 

39 
75 
31 
35 
528 

43 

148 

88 

371 

250 


No.  of 
St.  Bks. 


3 
7 

199 
21 

127 

4 
36 


207 
142 
274 
202 
437 
94 

175 
302 
178 

390 
200 

405 
306 
412 
257 


State 


Illinois 

Michigan 

Wisconsin.  .  .  . 
Minnesota.  .  .  . 

Iowa 

Missouri 

North  Dakota. 
South  Dakota. 

Nebraska 

Kansas 

Montana 

Wyoming 

Colorado 

New  Mexico. .  . 
Oklahoma.  .  .  . 
Washington. .  . 

Oregon 

California 

Idaho 

Utah 

Nevada 

Arizona 

Alaska 

Hawaii 

Porto  Rico. . .  . 
Philippines. . .  . 


No.  of 
Nat.  Bks. 


412 

97 
129 
266 

319 

125 

^33 

93 

215 
211 

43 
29 

113 
41 

242 
69 
69 

149 
42 
20 
II 

13 
2 

4 
I 


No.  of 
St.  Bks. 


389 
335 
455 
623 
282 
964 

432 

407 

625 

757 

50 

39 

82 

26 

608 

185 

105 
320 

99 
55 
24 

32 

II 

10 

8 

9 


Legislation  regarding  state  banks  since  the  Civil  War 
has  tended  in  the  direction  of  the  more  careful  regulation 
and  the  better  safeguarding  of  the  business.  The  national 
banking  act  has  undoubtedly  served  as  a  stimulus  and  to 
some  extent  as  a  model.  Such  requirements  as  the  ac- 
cumulation of  a  surplus  fund  from  earnings,  double  lia- 
bility of  stockholders,  a  minimum  cash  reserve  and  an  ad- 
ditional reserve  on  deposit  in  reserve  cities,  the  organization 
of  a  banking  department,  regular  reports  and  examinations, 
limitation  of  real  estate  holdings  and  restrictions  on  loans 
are  already  very  common  and  seem  destined  to  become 


1 88  Money  and  Banking 

universal.  A  few  of  the  states  have  gone  beyond  the  re- 
quirements of  the  national  banking  act,  especially  in  the 
matter  of  protecting  depositors.  Of  these  the  most  note- 
worthy is  Oklahoma  which  has  inaugurated  a  system  of 
compulsory  insurance  of  deposits.  The  desirability  of  such 
legislation  is  generally  questioned  and  its  effects  are 
problematical. 

Next  to  improvement  in  the  state  banking  laws  the  most 
noteworthy  movement  in  this  field  since  the  Civil  War  has 
been  the  development  of  a  new  type  of  institution  known  as 
the  trust  company.  In  some  of  the  older  states  the  begin- 
ning of  institutions  of  this  type  dates  beyond  the  Civil  War, 
but  their  rapid  growth  in  these  states  and  their  spread 
throughout  the  Union  belong  to  the  period  under  considera- 
tion. At  the  beginning  of  the  year  19 lo  they  were  to  be 
found  in  at  least  thirty-nine  of  the  states  and  their  total 
number  exceeded  one  thousand. 

As  the  name  implies,  most  of  these  institutions  were 
originally  incorporated  for  the  purpose  of  administering 
trusts  of  various  kinds,  such  as  the  management  and  settle- 
ment of  estates,  the  management  and  investment  of  funds 
left  to  windows,  orphans,  public  institutions  etc.,  the  reg- 
istration and  transfer  of  corporate  securities,  the  under- 
writing and  marketing  of  stock  and  bond  issues,  etc.,  etc. 
These  still  remain  the  chief  branches  of  their  business,  but 
in  most  cases  they  have  associated  with  these  the  collection 
and  investment  of  savings,  and  in  many  states  the  business 
of  commercial  banking.  Lending  on  real  estate  security  is 
a  favorite  form  of  investment  with  them,  and  in  this  con- 
nection some  of  them  issue  bonds  and  do  a  business  some- 
what resembling  that  of  the  mortgage  banks  of  Europe. 

The  development  of  trust  companies  has  been  accom- 
panied in  most  states  by  special  laws  for  their  regulation. 
In  many  cases,  especially  in  the  early  days  of  the  move- 


Banking  in  the  United  States  189 

ment,  these  pertained  almost  exclusively  to  the  trust  fea- 
tures of  their  business  and  permitted  the  performance  of 
banking  functions  either  entirely  without  regulation  or 
under  regulations  quite  different  from  and,  usually,  more 
liberal  than  those  imposed  upon  banking  institutions.  The 
result  was  unequal  competition  between  them  and  banks, 
friction,  and  agitation  for  the  modification  of  the  laws  per- 
mitting such  injustice.  In  consequence,  in  recent  years 
especially,  state  legislatures  have  busied  themselves  with  the 
problem  of  harmonizing  their  banking  and  trust  company 
laws.  The  tendency  now  seems  to  be  in  the  direction  of 
making  suitable  regulations  for  each  branch  of  business 
carried  on  by  both  classes  of  institutions  and  of  requiring 
compliance  with  those  regulations  by  any  institution,  how- 
ever named,  which  transacts  that  kind  of  business.  * 

Concentration,  which  has  been  so  prominent  a  feature  of 
recent  banking  history  in  European  countries,  has  also  ap- 
peared in  the  United  States,  although  the  prohibition  of 
branch  banking  by  our  national  banking  act  and  by  many 
of  our  states  has  been  an  obstacle  of  no  slight  proportions. 
The  movement,  so  far  as  it  has  been  realized  here,  has  oc- 
casionally taken  the  form  of  amalgamations,  but  more 
often  of  concentration  of  stockownership  of  institutions 
remaining  independent  in  form  or  of  the  establishment  of 
community  of  interests  between  previously  competing  in- 
stitutions or  between  those  that  naturally  supplement  each 
other.  The  concentration  of  ownership  of  state  and  national 
banks  and  trust  companies  located  in  the  same  town  is  a 
phenomena  of  frequent  occurrence  in  every  part  of  the 
country.  In  New  York  City  this  movement  has  extended 
farthest,  most  of  the  state  and  national  banks  and  trust 
companies  of  that  city  being  really  controlled  by  a  few 
groups  of  financiers  who  are  also  the  controlling  forces  in 
the  railroads  and  the  trusts  of  the  country. 


I  go  Money  and  Banking 

REFERENCES 

The  most  elaborate  treatises  on  the  history  of  banking  in  the  United 
States  are  Knox,  A  History  of  Banking  in  the  United  States,  and  Sum- 
ner, A  History  of  Banking  in  the  United  States,  the  latter  published 
as  V.  I  of  the  History  of  Banking  in  all  the  leading  Nations.  A  good 
brief  account  is  given  in  White,  2d.  ed.  chs.  iv.  to  xiv. 

Special  periods,  phases  and  institutions  are  treated  in  Barnett,  State 
Banking  in  the  United  States  since  the  passage  of  the  National  Bank- 
ing Act,  J.  H.  U.  Studies,  Feb.  and  March,  1902;  Conant,  Modern 
Banks  of  Issue,  chs.  xiii,  xiv  and  xv;  Dunbar,  History  and  Theory 
of  banking,  ch.  ix;  Gouge,  Short  History  of  Paper  Money  and  Bank- 
ing in  the  United  States;  Elliott,  Funding  System,  Ex.  Docs,  i  Sess. 
28th  Cong.,  No.  15 ;  Gallatin,  Considerations  of  the  Currency  and 
Banking  Systems  of  the  United  States;  Report  of  the  Comptroller 
of  the  Currency  for  1876;  Catterall,  The  Second  Bank  of  the  United 
States;  Holdsv^^orth  and  Dewey,  The  First  and  Second  Banks  of  the 
United  States;  and  Kinley,  The  Independent  Treasury. 

In  Sound  Currency  published  a  ievf  years  ago  by  the  Reform  Club 
appeared  the  following  monographs  worthy  of  note :  in  v.  11,  White, 
National  and  State  Banks;  and  Root,  New  York  Bank  Currency,  New 
England  Bank  Currency  and  States  as  Bankers;  in  v.  iv.  Root,  The 
First  United  States  Bank  and  The  Second  United  States  Bank;  in  v. 
V,  Garnett,  Banks  of  Issue  in  Illinois;  Harding,  The  State  Bank  of 
Indiana;  and  Root,  Early  Banks  of  Issue  in  Wisconsin;  in  v.  vii, 
Stackpole,  State  Banking  in  Maine;  and  in  v.  x,  Millsaps,  History  of 
Banking  in  Mississippi.  See  also  Merritt,  The  Early  History  of  Bank- 
ing in  Iowa,  and  Hadden,  History  of  the  State  Banks  and  Early  Banking 
in  Wisconsin. 

Convenient  summaries  of  laws  pertaining  to  banking  in  the  United 
States  are :  Dunbar,  Laws  of  the  United  States  relating  to  Currency, 
Finance  and  Banking  from  1789  to  1891,  and  Weldon,  Digest  of  State 
Banking  Statutes  published  by  the  National  Monetary  Commission. 

On  Trust  Companies  and  their  development  see  Kirkbride  and 
Sterritt,  The  Modern  Trust  Company;  Cator,  Trust  Companies  in  the 
United  States,  J.  H.  U.  Studies,  xx,  p.  269;  Herrick,  Trust  Companies, 
Bankers'  Magazine  for  1904  and  1905 ;  and  Noyes,  The  Trust  Company, 
Pol.  Sci.  Quart,  v.  xvi,  p.  250. 

See  also  references  at  the  close  of  ch.  xv. 


CHAPTER  XI 
BANKING  IN  CANADA 

Inasmuch  as  the  history  of  banking  in  Canada  has  been 
influenced  by  the  general  poHtical  history  of  the  country,  it 
will  be  necessary  to  preface  our  account  with  a  brief  state- 
ment of  the  grand  divisions  of  Canadian  history. 

I.  Epochs  in  the  history  of  Canada. — Previous  to  1791 
the  settlements  in  Canada  were  governed  directly  by  Eng- 
land through  a  governor  and  council.  In  that  year  a  change 
was  made  by  the  organization  of  the  four  provinces  of  New 
Brunswick,  Nova  Scotia,  Lower  Canada  and  Upper  Canada, 
and  by  conferring  the  power  of  constitutional  government 
upon  each  one  of  these  provinces.  From  that  time  until 
1841  each  of  these  provinces  had  a  legislature  of  its  own 
and  substantial  legislative  independence,  the  Governor-Gen- 
eral exercising  advisory  and  in  some  instances  veto  powers. 
In  184 1  the  provinces  of  Upper  and  Lower  Canada  were 
united  into  the  Province  of  Canada,  so  that  from  this  date 
until  1867  there  were  three  instead  of  four  provinces  in 
what  is  now  the  Dominion  of  Canada.  In  1867  was  passed 
the  so-called  British-North  American  Act,  which  provided 
for  the  federation  of  the  existing  provinces  and  the  forma- 
tion of  new  provinces  in  the  future.  Under  the  operation 
of  this  act  the  province  of  Canada  was  again  sub-divided 
into  the  provinces  of  Quebec  and  Ontario,  and  subsequently 
the  new  provinces  of  Prince  Edward  Island,  Manitoba  and 
British  Columbia  were  added  and  the  Northwest  territories 
divided  into  five  districts. 

Corresponding  with  these  main  divisions  are  some  fea- 
tures of  the  banking  history  of  Canada.  Until  1867  the  leg- 
islative authorities  in  regard  to  banking  were  those  of  the  in- 

191 


192  Money  and  Banking 

dividual  provinces,  the  only  unifying  institution  being  the 
English  government,  operating  through  the  Governor-Gen- 
eral. From  184 1  to  1867  in  the  two  chief  provinces,  that 
of  Upper  and  Lower  Canada,  there  was  legislative  unity, 
and  as  a  result  unification  of  banking  legislation  was  accom- 
plished during  that  period  throughout  the  most  important 
part  of  what  is  now  the  Dominion  of  Canada.  The  most 
prominent  features  of  banking  legislation  since  1867  have 
been  the  passage  of  a  series  of  general  banking  acts,  the 
result  of  which  has  been  the  unification  of  banking  regula- 
tions throughout  the  Dominion  and  the  development  of  a 
banking  system  in  some  respects  peculiar  to  Canada  and  in 
all  respects  interesting  and  instructive. 

2.  Early  conditions. — The  economic  and  social  history 
of  Canada  has  been  very  similar  to  that  of  the  United 
States.  In  both  cases  it  began  with  small  communities 
isolated  to  a  considerable  degree  and  living  necessarily 
under  primitive  conditions.  The  early  methods  of  ex- 
change in  Canada  have  been  admirably  described  in  the 
following  manner  by  Professor  Shortt,  formerly  of  Queen's 
University,  Kingston: 

"Owing  to  the  nature  of  the  physical  and  geographical 
conditions  of  the  first  settlers  in  Upper  Canada,  the  means 
of  communication  being  very  imperfect,  the  settlers  had  lit- 
tle or  no  choice  as  to  the  places  in  which  they  might  pur- 
chase supplies  or  dispose  of  their  products.  Even  though 
there  had  been  an  abundance  of  circulating  medium,  their 
trade  would  still  have  been  essentially  one  of  barter,  an 
exchange  of  their  surplus  products  with  the  nearest  mer- 
chant for  a  limited  range  of  goods. 

Many  functions  were  united  in  one  person  in  those  days. 
All  kinds  of  goods  were  supplied  by  one  merchant ;  all  kinds 
of  surplus  products  were  purchased  and  exported  by  the 
same  merchant.  Where  mills  were  erected  the  leading 
merchants  commonly  owned  them.    In  many  places  in  Up- 


Banking  in  Canada  193 

per  Canada,  during  this  period,  a  typical  trading  center 
consisted  of  a  flour  mill,  still,  saw-mill,  general  store,  tavern 
and  blacksmith  shop.  In  more  important  places  a  woollen 
mill  or  at  least  a  carding  machine  were  added.  Very  often 
all  these  were  owned  by  one  man.  Typical  representa- 
tives of  such  establishments  were  the  Napanee  Mills  in  the 
east,  and  the  Albion  Mills  near  Ancaster  in  the  west. 

Even  in  the  earliest  stages  of  the  settlements  the  im- 
porter was  also  the  exporter,  and  barter  the  natural  system 
of  trade.  Supplies  were  required  by  the  settlers  throughout 
the  year,  while  their  products  came  in  for  sale  mainly  in  the 
autumn;  hence  to  equalize  matters  it  was  customary  for 
the  merchants,  on  the  one  hand,  to  give  credit  for  supplies, 
to  be  paid  for  in  products  later  on,  or  on  the  other  hand, 
in  the  case  of  those  who  brought  products  in  advance,  to 
issue  due-bills  or  bons,  to  be  ultimately  redeemed  in  goods, 
or  partly  in  goods  and  partly  in  cash.  These  bons  were 
usually  made  payable  on  demand,  though  not  necessarily 
payable  in  cash.  Together  with  ordinary  promissory  notes, 
which  enjoyed  a  considerable  local  circulation,  they  supple- 
mented the  metallic  money  in  the  settlements,  and,  under 
the  circumstances  of  the  time  furnished  a  fairly  effective 
medium  of  exchange.  All  things  considered,  we  cannot 
but  admit  that  in  the  early  years  of  the  upper  province  these 
local  media  of  exchange  were  much  more  manageable, 
if  not  more  secure,  than  any  bank  notes  could  have  been. 

"The  merchants,  for  their  part,  in  obtaining  their  goods 
and  disposing  of  their  accumulated  products,  usually  dealt 
with  a  few  large  importers  at  such  places  as  Queenstown 
and  Kingston.  The  merchants  in  these  places  also  acted  as 
bankers  and  bill  brokers  for  the  local  merchants,  receiving 
deposits,  obtaining  from  their  customers  orders  drawn  upon 
various  persons,  and  permitting  their  customers  to  draw 
orders  upon  them.  These  wholesale  merchants  sold  as 
much  as  possible  of  the  produce  sent  to  them  to  the  govern- 
ment agents  for  the  supply  of  the  military  and  Indian  posts, 
exporting  the  remainder  to  Montreal,  and  importing  from 
Montreal  the  supplies  with  which  they  furnished  the  local 
merchants.  As  the  imports  were  greater  than  the  exports, 
the  balance  was  met  by  bills  of  exchange  on  London  from 


194  Money  and  Banking 

the  commissariat  officers,  vouchers  for  pensions,  and  other 
miscellaneous  bills  coming  from  all  parts  of  the  province. 
The  larger  importers  in  Montreal  acted  also  as  bankers  for 
the  wholesale  men  in  the  upper  province,  receiving  deposits, 
making  payments  to  order,  and  not  infrequently  advancing 
loans  or  credits  to  be  met  later  on  by  produce,  exchanges, 
or  cash,  though  we  find  very  little  of  the  latter  passing," 
(The  Early  History  of  Canadian  Banking,  pp.  6  and  7.) 

This  primitive  method  of  exchange  was  never  perfect 
and  was  soon  outgrown.  Complaints  w^ere  early  made  of 
the  power  which  these  banker  merchants  obtained  over 
the  prices  of  the  farmers'  products  and  of  the  disadvantages 
under  which  government  operations,  particularly  of  a  mili- 
tary character,  were  placed  as  a  result  of  these  restrictions. 
The  representatives  of  the  English  government  in  Canada 
early  proposed  means  of  freeing  the  settlers  and  the  public 
officials  from  their  dependence  upon  the  merchants.  These 
took  the  form  either  of  paper  money  or  banking  expedients, 
but  none  of  them  were  adopted  until  the  declaration  of  war 
between  the  United  States  and  England  in  18 12, 

During  this  period  there  were  issued  in  Canada  a  species 
of  paper  money  known  as  army  bills.  The  quantity  issued 
was  sufficient  to  provide  for  the  most  pressing  currency 
needs  of  the  provinces,  and  the  conditions  under  which 
these  issues  were  made  were  such  as  to  prevent  their  serious 
depreciation.  The  advantages  which  came  from  the  circula- 
tion of  these  notes  and  the  scarcity  of  currency  which  suc- 
ceeded their  retirement  were  chiefly  responsible  for  the 
success  of  the  banking  propositions  which  w^ere  made  as  a 
remedy  for  the  financial  difficulties  of  the  time. 

3.  The  first  banks. — In  all  the  provinces  requests  were 
made  for  bank  charters  at  a  comparatively  early  period, 
but  the  first  one  which  was  actually  granted  was  in  the 
province  of  Upper  Canada  and  led  to   the  establishment 


Banking  in  Canada  195 

of  a  chartered  bank  in  that  province  in  the  year  181 7. 
Previous  to  1825  five  banks  in  all  were  chartered  in  the 
four  provinces;  three  in  Lower  Canada,  and  one  each  in 
Upper  Canada  and  New  Brunswick.  Two  private  insti- 
tutions were  also  established,  one  in  Upper  Canada  and 
one  in  Nova  Scotia.  These  latter  institutions  were  short- 
lived and  the  subsequent  development  of  banking  in  Canada 
was  based  upon  the  five  chartered  institutions.  The  pro- 
visions of  these  early  charters  are,  therefore,  basal  and 
must  be  briefly  described. 

For  the  three  banks  in  Lower  Canada  the  following  char- 
ter provisions*  were  typical : 

(i)      Charters  were  to  continue  for  ten  years. 

(2)  The  directors  were  to  be  British  subjects. 

(3)  Dividends  were  to  be  declared  as  often  as  one- 
half  yearly,  but  only  when  profits  were  earned.  In  paying 
dividends  no  encroachment  should  be  made  upon  the  capital. 
Directors  were  obliged  to  submit  a  clear  statement  of  the 
bank's  position  to  the  share-holders  at  the  annual  meeting. 

(4)  Banks  might  receive  deposits,  deal  in  bills  of  ex- 
change, discount  notes,  buy  silver  coin,  bullion,  etc.,  but 
might  not  engage  in  any  business  other  than  banking. 

(5)  Banks  could  not  lend  money  directly  upon  real 
property ;  they  could,  however,  take  such  property  as  further 
security  for  loans  already  made.  They  were  not  permitted 
to  lend  money  to  a  foreign  country, 

(6)  They  were  permitted  to  issue  notes  to  circulate  as 
money,  but  no  limit  upon  this  right,  other  than  that  placed 
upon  their  general  obligations,  was  fixed. 

(7)  The  government  might  require  at  any  time,  for 
the  protection  of  the  public,  a  statement  under  oath  of  the 
position  of  the  bank, 

*These  were  taken  from  Walker's  "Banking  in  Canada,"  pp.  428  and 
429, 


196  Money  and  Banking 

(8)  Tranfers  of  shares  in  the  bank  were  not  to  be 
vaHd  unless  registered  in  the  stock-book  of  the  bank,  and 
the  bank  was  given  a  prior  Hen  on  the  stock  for  ordinary 
debts  due  to  the  holder. 

(9)  The  total  liabilities  were  not  to  exceed  three  times 
the  capital  stock  actually  paid  in,  and  directors  were  per- 
sonally liable  if  they  permitted  such  excess, 

(10)  Any  director  might  save  himself  by  publicly  pro- 
testing within  eight  days  after  the  transactions  causing  the 
excess  took  place, 

(11)  The  share-holders  were  exempt  from  any  liability 
except  that  of  payment  for  the  stock  for  which  they  had 
subscribed,  with  a  penalty  of  five  per  cent,  for  non-payment 
after  instalments  matured, 

(12)  Voting  by  shareholders  was  not  in  exact  propor- 
tion to  shares  held,  the  number  of  votes  diminishing  by 
scale  as  the  holdings  increased,  so  that  while  one  share  gave 
one  vote,  ten  shares  gave  only  five,  and  thirty  shares  only 
ten ;  no  holding  gave  more  than  twenty  votes. 

In  the  nature  of  its  charter  the  Bank  of  Upper  Canada 
did  not  differ  materially  from  those  of  the  lower  province. 
One  essential  difference  was  the  fact  that  the  government 
was  permitted  to  subscribe  for  2000  shares  of  the  stock  of 
this  bank  and  was  allowed  to  name  four  of  the  fifteen 
directors.  Provision  was  made  in  the  charter  of  this  bank 
also  for  periodical  instead  of  occasional  reports  to  the 
government,  one  being  required  each  year. 

It  is  claimed  by  Professor  Shortt  that  the  charters  of 
these  early  banks  were  closely  modelled  after  that  of  the 
Second  Bank  of  the  United  States  rather  than  after  those 
of  the  Scotch  banks,  as  has  been  frequently  asserted.  They 
certainly  bear  more  similarity  to  the  former  than  to  the 
latter,  and  on  account  of  the  close  relations  which  existed 
between  the  two  countries  it  is  perfectly  natural  that  they 


Banking  in  Canada  197 

should  have  copied  after  their  nearer  neighbor  whose  eco- 
nomic conditions  so  closely  resembled  their  own. 

Between  the  years  1825  and  1837,  as  the  need  for  bank- 
ing institutions  developed,  other  charters  were  granted, 
modelled  upon  those  already  described.  Five  banks  in  all 
were  chartered  in  the  province  of  New  Brunswick,  one  in 
Nova  Scotia,  two  each  in  Upper  and  Lower  Canada,  and 
one,  the  Bank  of  British  North  America,  was  chartered  in 
England  with  authority  to  do  business  in  all  the  provinces. 
The  only  peculiarities  worth  mentioning  in  the  charter  pro- 
visions of  these  new  banks  are  indicated  in  the  fact  that  the 
Bank  of  Nova  Scotia  introduced  into  Canada  the  principle 
of  double  liability  for  stockholders,  that  the  Bank  of 
British  North  America  was  not  permitted  to  issue  notes 
below  the  denomination  of  one  pound,  or  four  dollars,  and 
that  La  Banque  du  Peuple  of  Montreal  was  not  a  pure 
joint-stock  institution  of  the  modern  sort,  but  a  combina- 
tion of  a  partnership  and  joint-stock  company.  It  had 
twelve  partners,  who  were  subject  to  unlimited  liability, 
and  it  was  permitted  to  have  an  indefinite  number  of  asso- 
ciates or  stockholders  whose  liability  did  not  extend  beyond 
the  payment  for  the  stock  for  which  they  subscribed. 

4.  Restraining  influences  on  banking  excesses. — The 
student  of  banking  history  in  the  United  States  will  be  sur- 
prised at  the  small  number  of  banks  established  in  Canada 
during  this  period,  while  across  the  border  such  institutions 
were  increasing  in  numbers  with  great  rapidity.  The  ex- 
planation of  the  difference  in  this  respect  between  the  two 
sections  is  to  be  found  in  the  restraining  influences  which 
were  operative  in  Canada  and  not  in  the  United  States. 
In  the  former  country  the  same  tendencies  were  at  work 
as  In  the  latter.  There  was  agitation  for  the  introduction 
of  the  principle  of  free  banking,  criticism  of  the  conserva- 
tism of  the  chartered  banks,  accompanied  by  claims  that  the 


igS  Money  and  Banking 

bank  capital  and  the  circulating  medium  of  the  country 
were  inadequate,  and  other  evidences  of  those  ideas  regard- 
ing credit  and  currency  which  seem  to  be  characteristic  of 
frontier  communities.  In  Canada  these  tendencies  were 
checked  in  part  at  least  by  the  attitude  of  the  English  gov- 
ernment, which  had  the  right  of  veto  over  bank  and  other 
forms  of  legislation.  The  process  of  securing  a  bank 
charter  consisted  in  its  passage  by  both  houses  of  the 
provincial  legislature,  and  its  signature  by  the  Governor- 
General,  whose  right,  however,  to  append  his  name  was  con- 
ditioned upon  the  consent  of  the  privy  council  of  the  Eng- 
lish government,  which  practically  meant  the  committee  for 
trade.  The  early  charters  were  frequently  delayed  for  two 
or  three  years  by  the  delay  of  the  home  government  in 
granting  its  consent,  and  as  early  as  1830  a  set  of  regula- 
tions were  prepared  and  submitted  to  the  legislature  through 
the  Governor  pertaining  to  the  conditions  under  which  the 
home  government  would  be  willing  to  give  its  consent  to  the 
granting  of  bank  charters.  These  regulations  have  been 
summarized  by  Mr.  Walker  (p.  437)  as  follows: 

"i.  Bank  charters  to  be  forfeited  by  suspension  for  sixty 
days  consecutively  or  during  a  year. 

2.  Note  issues  to  be  dated  where  issued  and  to  be  re- 
deemed in  specie  there  and  at  the  head  office.  No  branch 
need  redeem  notes  issued  at  any  other  branch  or  the  head 
office. 

3.  One-half  the  capital  to  be  paid  in  at  commencement, 
the  remainder  at  discretion. 

4.  The  directors  not  to  become  liable  on  obligations  to 
the  bank  exceeding  one-third  the  total  discounts  of  the  bank. 

5.  Bank  not  to  hold  its  own  stock  or  lend  money  thereon. 

6.  Half  yearly  statements  to  the  Government  of  average 
assets  and  liabilities  made  from  weekly  balance  sheets  with 
particulars  of  dividends  and  reserved  profits.     Special  re- 


i 

Banking  in  Canada  199 

turns  might  be  called  for,  and  must  be  verified  under  oath 
if  required. 

7.  Share-holders  subject  to  double  liability. 

8.  Banks  not  to  lend  on  real  estate." 

While  these  regulations  were  subsequently  incorporated 
into  the  charters  of  most  of  the  banks,  there  was  severe 
opposition  at  the  time  of  their  presentation,  chiefly  on  the 
ground  that  the  colonies  objected  to  interference  in  their 
banking  affairs  by  the  home  government.  However,  the 
pressing  of  restrictions  of  this  sort  upon  the  attention  of 
the  provinces,  and  the  discussion  and  opposition  which  it 
aroused,  tended  to  restrain  the  granting  of  bank  charters 
and  to  spread  correct  and  sound  ideas  regarding  banking 
institutions  among  the  people. 

Another  restraining  influence,  especially  in  Upper  Can- 
ada, was  the  disinclination  of  the  directors  and  stock- 
holders of  the  bank  of  Upper  Canada  at  Toronto  to  en- 
courage the  formation  of  rival  institutions.  This  bank, 
as  we  have  seen,  partook  to  some  extent  of  the  nature 
of  a  provincial  institution,  inasmuch  as  the  province  owned 
a  part  of  its  capital.  Its  promoters  and  the  members  of  its 
governing  body  were  either  provincial  officials  themselves 
or  the  powers  behind  the  throne,  and  they  were  able  directly 
or  indirectly  to  control  legislation,  and  accordingly  they  op- 
posed the  multiplication  of  bank  charters. 

Another  restraining  influence  was  the  crisis  of  1837  with 
its  lessons  regarding  the  danger  of  unprotected  bank-note 
issues.  Fortunately  for  Canada,  this  crisis  came  before 
the  forces  working  towards  inflation  and  unsound  banking 
had  gained  the  upper  hand.  Here,  as  in  the  United  States, 
all  the  banks  ultimately  were  forced  to  suspend  specie  pay- 
ments and  resumption  was  not  general  before  1839.  There 
was  severe  depression  of  trade  and  general  commercial  dis- 
tress here  as  elsewhere. 


200  Money  and  Banking 

5.  The  experiment  with  free  banking. — The  struggle  be- 
tween the  tendencies  which  favored  undue  bank  expansion 
and  these  restraining  influences  reiarded  the  development 
of  new  banking  institutions  up  to  about  1850.  In  that 
year  a  law  was  passed  inaugurating  the  experiment  of  free 
banking  on  substantially  the  same  principles  as  obtained 
at  the  time  in  the  state  of  New  York.  It  will  be  remem- 
bered that  the  free-banking  act  of  New  York  state  intro- 
duced into  this  country  not  only  the  principle  of  freedom 
of  banking  under  a  general  law,  but  also  that  of  note  issues 
based  upon  public  securities.  These  principles  gained  favor 
in  Canada  and  became  ultimately  the  expression  for  the 
tendencies  opposed  to  the  existing  chartered  institutions  and 
in  favor  of  more  rapid  bank  expansion. 

The  law  of  1850  provided  for  the  formation  of  banks 
with  a  minimum  capital  of  £25,000,  with  the  right  to  estab- 
lish one  office  only,  and  to  issue  notes  to  the  amount  of 
the  par  value  of  the  provincial  securities  which  they  might 
hold.  Provision  was  also  made  for  the  incorporation  of  this 
principle  in  part  into  the  charters  of  existing  banks  by  per- 
mitting an  extension  of  note  issues  beyond  a  proposed  min- 
imum on  condition  of  the  deposit  of  provincial  securities. 

This  experiment  failed,  only  live  banks  ever  having  or- 
ganized under  these  provisions,  and  of  these,  three  re- 
tired their  circulation  and  secured  special  charters  within 
five  years,  and  the  other  two  led  a  checkered  career  for 
a  few  years  and  then  disappeared  from  the  field.  The 
bank  of  British  North  America,  which  was  forbidden  by  its 
original  charter  to  issue  notes  below  one  pound  or  $4,  was 
the  only  chartered  bank  which  took  advantage  of  the  act, 
and  that  for  the  reason  that  it  gained  thereby  permission 
to  issue  notes  below  this  limit.  Mr.  Breckenridge,  in  his 
treatise  on  Canadian  banking,  clearly  shows  that  it  was  un- 
profitable for  the  other  chartered  banks  to  accept  the  princi- 


Banking  in  Canada  201 

pies  contained  in  this  act.  The  necessity  of  tying  up  a  por- 
tion of  their  capital  in  provincial  securities  bearing  a  rate 
of  interest  considerably  below  that  which  could  be  obtained 
by  ordinary  bank  loans  rendered  the  proposition  distasteful, 
because  unprofitable.  It  should  be  noted  that  this  experi- 
ment was  probably  due  quite  as  much  to  the  desire  of  the 
provincial  government  to  provide  a  good  market  for  its 
securities  as  to  the  apparent  success  of  the  experiment  in 
New  York  or  the  devotion  of  any  large  section  of  the 
population  to  the  principles  involved. 

The  failure  of  this  experiment  became  evident  as  early 
as  1855,  and  accordingly  at  this  time  there  was  a  resumption 
of  the  process  of  bank  expansion  through  special  charters 
which  had  characterized  the  earlier  period.  Between  the 
years  1855  and  1866  twenty-five  new  charters  were  granted 
in  the  various  provinces  and  about  fifteen  new  banks  came 
into  existence.  With  the  exception  of  four  or  five  banks, 
which  sooner  or  later  failed  or  were  deprived  of  their 
charters,  these  banks  have  continued  their  existence  down 
to  the  present  day,  either  as  independent  institutions  or  as 
parts  of  other  institutions  with  which  they  have  amalga- 
mated. The  cause  of  this  comparatively  rapid  increase  in 
the  number  of  banking  institutions  is  to  be  found  in  the  ex- 
pansion of  Canadian  markets,  due  to  the  reciprocity  treaty 
made  in  the  early  50's  with  the  United  States,  to  the  in- 
crease of  population,  especially  in  the  western  districts,  and 
to  the  industrial  expansion  which  was  occasioned  or  aided 
by  the  construction  of  railroads. 

The  charters  of  the  banks  granted  during  this  period 
and  the  changes  introduced  into  those  of  the  older  banks 
upon  the  occasion  of  their  renewal  show  decided  improve- 
ments over  the  earlier  charters.  These  were  due  in  part  to 
the  principles  recommended  by  the  Committee  for  Trade 
of  Her  Majesty's  privy  council,  and  in  part  to  the  experi- 


202  Money  and  Banking 

ence  gained  by  the  banks  themselves.  As  early  as  1830  the 
danger  of  permitting  private  bankers  to  issue  without  re- 
striction notes  of  low  denominations  was  appreciated, 
and  a  law  was  passed  in  Lower  Canada  prohibiting  the 
issue  of  notes  for  less  than  $5  by  any  except  a  chartered 
bank,  and  later  on  the  chartered  banks  were  prohibited  from 
issuing  notes  below  5  sh.  or  $1.  In  1837  the  same  restric- 
tions were  enacted  into  law  in  the  province  of  Upper 
Canada,  the  four  private  banks  then  in  existence  being  in- 
cluded with  the  chartered  banks  in  the  list  of  those  having 
the  right  to  issue  notes  of  denominations  as  low  as  5  sh. 

or$i. 

6.  Steps  toward  the  uniform  regulation  of  banking. — 
When  the  provinces  of  Upper  and  Lower  Canada  were 
united  in  1841,  a  committee  on  banking  and  currency  was 
appointed  which  reported  upon  incorporating  the  following 
restrictions  into  the  charters  of  the  banks  upon  the  occasion 
of  their  renewal: 

"ist.  The  amount  of  capital  of  the  company  to  be  fixed; 
and  the  whole  of  such  fixed  amount  to  be  subscribed  for 
within  a  limited  period,  not  exceeding  eighteen  months  from 
the  date  of  the  charter  or  Act  of  incorporation.  _ 

2nd.  The  bank  not  to  commence  business  until  the  whole 
of  the  capital  is  subscribed,  and  a  moiety  at  least  of  the 
subscription  paid  up. 

3rd.  The  amount  of  the  capital  to  be  paid  up  within  a 
given  time  from  the  date  of  the  charter  or  y\ct  of  Incor- 
poration, such  period,  unless  under  particular  circumstances, 
not  to  exceed  two  years. 

4th.  The  debts  and  engagements  of  the  company,  on 
promissory  notes  or  otherwise,  not  to  exceed  at  any  time 
thrice  the  amount  of  the  paid-up  capital,  with  the  addition 
of  the  amount  of  such  deposits  as  may  be  made  with  the 
company's  establishment  by  individuals  in  specie  or  Gov- 
ernment paper. 

5th.  All  promissory  notes  of  the  company,  whether  is- 


Banking  in  Canada  203 

sued  from  the  principal  establishment  or  from  the  branch 
banks,  are  to  bear  date  at  the  place  of  issue,  and  to  be  pay- 
able on  demand  in  specie  at  the  place  of  date. 

6th.  Suspension  of  specie  payments  on  demand  at  any  of 
the  company's  establishments,  for  a  given  number  of  days 
(not  in  any  case  exceeding  sixty)  within  any  one  year, 
either  consecutively  or  at  intervals,  to  forfeit  the  charter. 

7th.  The  company  shall  not  hold  shares  in  its  own  stock, 
nor  make  advances  on  the  security  of  their  own  shares. 

8th.  The  company  shall  not  advance  money  on  security 
of  lands,  or  houses,  or  ships,  or  on  pledge  of  merchandise, 
nor  hold  lands  or  houses,  except  for  the  transaction  of  its 
business ;  nor  own  ships  or  be  engaged  in  trade,  except  as 
dealers  in  bullion  or  bills  of  exchange;  but  shall  confine 
its  transactions  to  discounting  commercial  paper  and  nego- 
tiable securities  and  other  legitimate  banking  business. 

9th.  The  dividends  to  shareholders  are  to  be  made  out  of 
profits  only,  and  not  out  of  the  capital  of  the  company. 

loth.  The  company  to  make  up  and  publish  periodical 
statements  of  its  assets  and  liabilities  (half-yearly  or 
yearly)  showing,  under  the  heads  specified  in  the  annexed 
form,  the  average  of  the  amount  of  its  notes  in  circula- 
tion, and  other  Habilities  at  the  termination  of  each  week 
or  month,  during  the  period  to  which  the  statement  refers, 
and  the  average  amount  of  specie  or  other  assets  that  were 
available  to  meet  the  same.  Copies  of  these  statements  are 
to  be  submitted  to  the  Provincial  Government,  and  the 
company  be  prepared,  if  called  upon,  to  verify  such  state- 
ments, by  the  production,  as  confidential  documents,  of 
the  weekly  or  monthly  balance-sheets  from  which  the  same 
are  compiled.  And  also  to  be  prepared  upon  requisition 
from  the  Lord's  Commissioners  of  Her  Majesty's  Treasury, 
to  furnish  in  like  manner  such  further  information  respect- 
ing the  state  or  proceedings  of  its  banking  establishments 
as  their  Lordships  may  see  fit  to  call  for. 

nth.  No  by-law  of  the  company  shall  be  repugnant  to 
the  conditions  of  the  charter  or  Act  of  Incorporation,  or  the 
statutes  of  the  province. 

1 2th.  As  the  insertion  in  charters  or  Acts  of  Incorpora- 
tion of  provisions  relating  to  the  detailed  management  of 


204  Money  and  Banking 

the  business  of  the  corporation  has,  in  several  instances, 
been  found  to  render  the  documents  comphcated  and  unin- 
telhgible,  and  has  been  productive  of  great  inconvenience, 
it  is  desirable  that  such  insertion  should  be  avoided,  and  that 
the  provisions  of  such  charters  or  Acts  of  Incorporation 
should  be  confined,  as  far  as  practicable,  to  the  special 
powers  and  privileges  to  be  conferred  on  the  company,  and 
the  conditions  to  be  observed  by  the  company,  and  to  such 
general  regulations  relating  to  the  nomination  and  powers 
of  the  directors,  the  institution  of  by-laws,  or  other  pro- 
ceedings of  the  company,  as  may  be  necessary,  with  a  view 
to  public  convenience  and  security. 

13th.  No  company  to  be  allowed  to  issue  its  promissory 
notes  payable  on  demand,  to  an  amount  greater  than  its 
paid-up  capital."  * 

The  recommendations  of  this  committee  were  adopted, 
and  when  the  charters  of  the  banks  were  renewed  these 
recommendations  were  incorporated  together  with  the  prin- 
ciple of  double  liability  of  shareholders,  which  up  to  this 
time  had  been  in  force  only  in  the  provinces  of  New  Bruns- 
wick and  Nova  Scotia.  It  will  be  observed  that  under  these 
regulations  a  distinction  is  made  between  the  notes  of  the 
bank  and  its  other  liabilities  and  the  principle  introduced 
that  the  note-issues  should  be  limited  by  the  amount  of  the 
paid-up  capital  of  the  bank ;  a  principle  which  has  apparently 
become  permanently  established  in  Canadian  banking  legis- 
lation. 

7.  The  issue  of  Provincial  notes. — The  failure  of  the 
Canadian  government  to  improve  the  market  for  its  securi- 
ties through  the  free  banking  system  rendered  some  other 
scheme  to  that  end  desirable,  if  not  necessary.  The  con- 
struction of  railroads  and  other  internal  improvements  had 
greatly  increased  its  expenditures,  and  a  large  floating  debt 
had  accumulated  of  which  it  was  necessary  to  make  some 

♦Walker,  pp.  443,  444. 


Banking  in  Canada  205 

disposition.  A  considerable  part  of  this  debt  was  owed  to 
the  bank  of  Montreal,  which  since  1861  had  been  the  gov- 
ernment's banker.  Among  the  suggestions  made  for  the 
improvement  of  the  government  finances  was  the  estab- 
lishment of  a  provincial  bank.  But  this  did  not  meet  with 
the  approval  of  the  legislature,  and  finally  the  expedient 
was  adopted  of  authorizing  the  Governor  in  Council  to  issue 
provincial  notes  to  the  maximum  amount  of  $8,000,000. 
These  notes  were  to  be  payable  in  specie  on  demand  at 
Montreal  and  Toronto  and  to  be  legal  tender.  They  were 
to  be  secured  by  bonds  of  the  province  and  specie,  of  which 
the  latter  should  amount  to  20  per  cent,  until  the  issues  ex- 
ceeded $5,000,000,  and  to  25  per  cent,  for  any  excess  above 
that  amount.  The  plan  included  a  provision  for  the  retire- 
ment of  the  issues  of  the  banks  and  a  substitution  of  these 
notes  in  their  place.  In  order  to  induce  the  banks  to  accept 
this  arrangement,  the  government  offered  to  pay  any  bank, 
which  would  voluntarily  resign  its  right  to  circulate  notes, 
five  per  cent,  per  annum  of  the  amount  of  its  notes  outstand- 
ing on  April  30,  1866,  until  the  date  of  the  expiration  of  its 
charter,  and  to  allow  it  the  time  preceding  Jan.  i,  1868  for 
the  complete  retirement  of  its  issues.  The  government 
further  agreed  to  pay  to  such  banks,  for  the  issue  and  re- 
demption of  the  government  notes,  one-fourth  of  one  per 
cent,  every  three  months  on  the  average  amount  kept  in 
circulation,  and  to  release  them  from  the  requirement  of  in- 
vesting ten  per  cent,  of  their  capital  in  provincial  bonds. 

The  only  bank  which  accepted  this  arrangement  was  the 
Bank  of  Montreal,  which  at  that  time,  as  we  have  seen, 
held  a  large  part  of  the  government's  floating  debt  and 
was  practically  the  government's  banker. 

8.  The  British  North  American  Act  of  1867  in  its  relation 
to  banking.— The  passage  of  the  British  North  American 
act  in  1867  began  a  new  epoch  in  the  history  of  Canada. 


2o6  Money  and  Banking 

Under  its  provisions  the  four  original  provinces  were  fed- 
erated, and  one  legislature  from  this  time  on  took  the  place 
of  the  various  local  bodies,  and  legislation  in  regard  to 
banking  and  currency  became  the  prerogative  of  the  Do- 
minion. In  consequence,  the  era  of  provincial  banking 
ends  with  the  passage  of  this  act. 

The  problem  before  the  first  Dominion  legislature  with 
reference  to  money  and  banking  was  by  no  means  simple  or 
easy.  There  were  at  the  time  19  banking  institutions  in 
operation  in  the  old  province  of  Canada,  now  the  provinces 
of  Ontario  and  Quebec,  5  in  Nova  Scotia,  and  4  in  New 
Brunswick.  Uniform  regulations  had  been  introduced  for 
the  banks  of  the  two  provinces  of  Ontario  and  Quebec  as  a 
result  of  the  union,  in  1841,  of  the  old  provinces  of  Upper 
and  Lower  Canada.  There  was  a  considerable  degree  of 
similarity  between  the  bank  charters  of  the  provinces  of 
Nova  Scotia  and  New  Brunswick  and  those  of  Ontario  and 
Quebec,  but  important  differences,  nevertheless,  interfered 
with  the  unification  of  the  banking  system.  The  privileges 
of  the  banks  in  each  province  were  purely  local  and  their 
circulation  and  business  also  largely  local.  Two  of  the 
banks,  namely,  La  Banque  du  Peuple  of  the  old  province 
and  the  Bank  of  British  North  America,  were  operating 
under  charters  which  differed  from  those  of  all  the  others 
and  contained  many  peculiar  features.  The  Bank  of  Mon- 
treal was  the  largest  institution  in  the  country,  having 
a  paid-up  capital  of  $6,000,000  as  against  $4,000,000  of 
the  Commercial  Bank  of  Canada,  the  next  largest  institu- 
tion, and  numerous  branches  in  various  parts  of  Canada.  It 
was  the  government's  bank  and  the  only  institution  which 
had  taken  advantage  of  the  opportunity  to  retire  its  circula- 
tion offered  by  the  provincial  note  act  of  1866.  The  rela- 
tions of  this  institution  with  the  other  banks  were  not 
altogether  friendly  on  account  of  the  great  privileges  which 


Banking  in  Canada  207 

it  enjoyed.  The  charters  of  most  of  these  banks  expired 
in  a  few  years  after  the  passage  of  the  British  North 
American  act  and  consequently  an  opportunity  was  offered 
for  such  modification  in  their  charters  as  the  Dominion 
legislature  might  think  proper. 

Besides  the  problem  of  unification  and  improvement  of 
the  banking  system,  the  Dominion  legislature  was  called 
upon  to  legislate  regarding  the  paper  money  issues  of  the 
old  province  of  Canada  and  of  the  province  of  Nova  Scotia. 
The  latter  province  issued  a  provincial  currency  early  in 
its  history  and  had  maintained  that  form  of  currency  con- 
tinuously up  to  the  date  of  its  union  with  the  other  prov- 
inces. The  banks  in  that  province  had  not  been  permitted  to 
issue  notes  in  denominations  below  $20  in  order  to  leave 
room  for  the  circulation  of  the  provincial  notes.  In  Can- 
ada, as  we  have  already  seen,  provincial  notes  were  placed 
in  circulation  the  year  previous  to  the  union  and  most  of  the 
banks  were  issuing  notes  in  denominations  as  low  as  $1. 

Much  depended  upon  the  way  in  which  the  new  legisla- 
ture settled  these  financial  problems.  Any  measures 
adopted  were  certain  to  be  taken  as  precedents  for  the  fu- 
ture and  were  to  constitute  the  foundation  upon  which 
future  legislation  must  be  built.  The  legislature  seemed 
to  realize  this  fact,  and  its  earliest  measures  regarding 
the  banking  and  currency  system  were  of  a  temporary 
character,  designed  simply  to  give  the  legislature  time 
thoroughly  to  consider  the  problem  before  any  permanent 
measures  were  adopted  and  to  make  such  changes  as  were 
rendered  necessary  by  the  substitution  of  the  Federal  for 
the  provincial  legislatures. 

As  early  as  1868  various  plans  were  submitted  for  the 
unification  of  the  banking  system.  Among  these  the  most 
important  was  that  of  the  Minister  of  Finance,  Mr.  Rose, 
who  desired  to  introduce  the  main  features  of  the  national 


2o8  Money  and  Banking 

banking  system  of  the  United  States.  This  plan  was 
debated  at  great  length  and  quite  uniformly  opposed  by 
the  banking  and  commercial  interests  of  the  Dominion. 
The  bill  which  embodied  it  was,  therefore,  withdrawn,  and 
the  Minister  of  Finance  retired  in  favor  of  another  man 
who  was  inclined  to  consult  the  bank  experts  in  regard  to 
matters  of  this  sort.  The  result  of  the  deliberations  of 
the  Minister  of  Finance  and  his  associates  in  and  out  of  the 
legislature  was  the  preparation  of  a  bill  regarding  banks, 
which  was  enacted  into  law  on  the  12th  day  of  May,  1870. 
Before  describing  this  act,  however,  it  will  be  necessary  to 
note  the  disposition  made  of  the  notes  authorized  to  be 
issued  by  the  provincial  note  act  of  1866.  This  is  indicated 
in  the  following  summary  of  regulations: 

"(a)  The  management  of  the  Dominion  note  circula- 
tion directly  by  the  Government. 

(b)  The  establishment  of  branch  offices  of  the  Receiver- 
General's  Department  in  Montreal,  Halifax,  St.  John's  and 
Toronto,  for  the  issue  and  redemption  of  notes. 

(3)  The  authorized  extension,  by  Order-in-Council  on 
report  of  the  Treasury  Board,  of  the  issue  to  $9,000,000  in 
amounts  of  not  more  than  $1,000,000  at  a  time,  and  at 
intervals  of  not  less  than  three  months. 

(d)  The  requirement  that  the  Receiver-General  should 
hold  specie  and  Dominion  debentures  to  cover  the  outstand- 
ing circulation ;  the  debentures  to  be  issued  and  held  for  the 
purposes  of  the  Act,  or  to  be  disposed  of  temporarily  or 
absolutely  in  order  to  provide  specie  for  redemption;  the 
debentures  not  to  exceed  80%  of  the  circulation,  the  specie, 
as  a  rule,  to  be  a  sum  equal  to  25%  of  the  debentures,  and 
never  less  than  15%. 

(e)  Provision  for  the  issue  of  any  amount  required  by 
the  public  convenience,  so  long  as  the  excess  over  $9,000,000 
should  be  covered  by  equivalent  amounts  of  specie."  * 

The  effect  of  this  provision  was  to  do  away  with  the 

*  (Breckenridge,  "The  Canadian  Banking  System,   1817-1890,"  Pub- 
lications of  Amer.  Ec.  Ass'n.,  vol.  x.,  p.  252.) 


Banking  in  Canada  209 

anomalous  position  occupied  by  the  Bank  of  Montreal  and 
to  restore  that  institution  to  something  like  its  original 
position.  It  also  authorized  the  increase  in  the  quantity  of 
notes  to  be  issued  and  a  slight  change  in  the  security  by 
which  they  were  backed. 

9.  The  bank  acts  of  1870  and  1871.— The  act  of  1870  took 
the  form  of  a  series  of  restrictions  which  it  was  provided 
should  be  introduced  into  the  charters  of  existing  banks 
whenever  they  were  renewed  and  into  those  of  all  new 
banks,  together  with  such  others  as  were  provided  by  exist- 
ing legislation.  The  chief  provisions  of  the  act  may  be 
summarized  under  the  following  heads: 

( 1 )  Capital.  No  bank  was  to  be  permitted  to  begin  busi- 
ness or  to  issue  notes  until  $200,000  of  its  capital  should 
have  been  paid  up  and  the  fact  certified  to  by  the  Treas- 
ury Board.  Twenty  per  cent,  of  the  subscribed  capital 
beyond  this  amount  should  be  paid  each  year  after  the 
beginning  of  business.  This  paid-up  capital  must  not  be 
impaired  by  any  distribution  of  dividends,  and  whenever 
for  any  reason  impaired,  the  amount  should  be  made  good 
forthwith  by  calls  on  the  shareholders  for  any  unpaid  por- 
tion of  their  capital  stock  and  by  the  application  of  all  net 
profits.  No  division  of  profits  by  way  of  dividend  or  bonus 
should  be  permitted  to  exceed  eight  per  cent,  per  annum  un- 
til a  reserve  fund,  after  deducting  any  bad  or  doubtful  debts, 
equal  to  20  per  cent,  of  the  paid-up  capital  stock  should  be 
accumulated. 

(2)  Note  issues  and  reserves.  The  amount  of  note-is- 
sues by  any  bank  was  not  to  exceed  the  amount  of  the  bank's 
unimpaired,  paid-up  capital,  and  no  note  of  less  denomina- 
tion than  $4  was  permitted  to  be  issued.  The  notes  of  the 
bank  were  to  be  received  in  payment  at  any  of  its  offices, 
but  should  not  be  payable  in  specie  or  Dominion  notes 
at  places  other  than  those  specifically  named  in  the  note 


2IO  Money  and  Banking 

itself,  one  of  such  places  being  always  the  bank's  chief  city 
of  business.  There  was  no  provision  fixing  the  proportion 
of  cash  reserves  to  liabilities,  but  the  bank  was  required  to 
hold  usually  one-half  and  not  less  than  one-third  of  its  cash 
reserve  in  Dominion  notes. 

(3)  Loans  on  security  of  stock  and  to  directors.  Banks 
were  forbidden  to  make  loans  on  security  of  their  own 
stock,  afnd  were  to  have  a  lien  upon  the  shares  and  unpaid 
dividends  of  debtors  for  any  overdue  debt.  Discounts 
or  advances  to  any  director  or  firm  of  which  a  director 
was  a  partner  should  not  exceed  one-twentieth  of  the  total 
discounts  of  the  bank  at  the  same  time. 

(4)  Double  liability  of  stockholders.  In  case  the  pro- 
perty or  assets  of  any  bank  should  be  insufficient  to  pay  its 
liabilities,  the  shareholders  were  made  liable  for  the  defi- 
ciency to  the  amount  of  their  respective  shares,  in  addition 
to  any  amount  on  those  shares  not  yet  paid  up. 

(5)  Votes  of  shareholders.  Contrary  to  the  preceeding 
practice,  each  share  of  stock  was  permitted  one  vote. 

(6)  Returns  to  the  government.  Banks  were  required 
to  make  monthly  returns  to  the  government  of  their  assets 
and  liabilities  in  an  expanded  and  improved  form  prescribed 
in  detail  in  the  act.  They  were  also  required  to  furnish 
the  Minister  of  Finance  each  year,  before  the  date  appointed 
for  the  opening  of  Parliament,  a  certified  list  of  their 
shareholders,  the  stock  held  by  each,  and  their  residence. 

(7)  Charter  period.  The  principle  of  revision  of  char- 
ters every  ten  years  was  introduced,  and  accordingly  the 
charters  of  all  banks  newly  incorporated  or  renewed  were 
to  expire  at  the  end  of  the  session  of  Parliament  next 
after  the  ist  of  January,  1881. 

Inasmuch  as  this  act  took  the  form  simply  of  a  number 
of  restrictions  which  should  be  incorporated  into  the  char- 
ters of  new  banks  or  of  old  ones  when  renewed,  it  did  not 


Banking  in  Canada  211 

contain  all  the  provisions  which  were  regulative  of  banks 
and  did  not  secure  any  uniformity  in  the  internal  manage- 
ment of  the  various  banking  institutions.  Such  uniformity 
was  desired  by  the  bankers,  and  in  order  to  obtain  it  an  act 
was  passed  in  the  following  year  incorporating  the  provi- 
sions of  the  act  of  1870  and  such  others  as  were  provided  by 
existing  legislation  and  were  designed  to  secure  uniformity 
in  banking  matters. 

The  principal  modifications  introduced  into  existing  legis- 
lation by  this  new  act  were  the  provisions  that  the  maximum 
amount  of  capital  subscribed  for  a  new  bank  must  not  be 
less  than  $500,000,  and  that  the  maximum  paid  in  before 
commencing  business  must  not  be  less  than  $100,000,  and 
that  an  additioHal  $100,000  must  be  paid  in  within  two 
years.  The  act  further  revised  the  previous  legislation 
regarding  the  use  of  warehouse  receipts  as  a  security  for 
bank  loans,  and  authorized  banks  to  make  loans  on  the 
security  of  the  stock  of  other  banks,  and  of  municipal,  state 
and  corporate  securities  within  Canada,  and  the  public  se- 
curities of  foreign  countries. 

10.  The  decade  1870  to  1880  and  the  revision  of  1880. — 
The  first  decade  after  the  passage  of  the  new  bank- 
ing act  is  notable  on  account  of  the  contrast  between  the 
prosperity  of  the  first  part  of  the  period  and  the  depression 
of  the  latter  part.  Commerce  and  industry  expanded  very 
rapidly  in  Canada  in  the  years  1867  to  1874.  There  was 
a  rapid  growth  of  population,  a  rapid  extension  of  the  rail- 
way system,  a  large  increase  in  the  products  of  agriculture, 
and  expansion  along  all  lines,  A  natural  result  of  this  was 
a  considerable  increase  in  the  number  of  banking  institu- 
tions. Nineteen  all  told  began  business  during  this  period. 
A  considerably  larger  number  of  charters  than  this  were 
granted,  but  many  were  forfeited  for  non-usure  on  account 
of  the  inability  of  the  projectors  to  secure  the  requisite 


212  Money  and  Banking 

amount  of  capital  within  the  time  appointed.  The  largest 
number  of  these  institutions  was  established  in  the  years 
1872  and  1873. 

The  crisis  which  passed  over  the  United  States  in  1873 
affected  Canada,  but  in  a  much  less  degree.  In  that  country 
it  inaugurated  a  period  of  depression  rather  than  one  of 
severe  crisis.  The  result,  however,  so  far  as  banking  in- 
stitutions were  concerned,  was  disastrous.  A  number  of 
banks  were  obliged  to  cut  down  their  capitals  and  greatly 
to  diminish  the  magnitude  of  their  business,  while  still 
others  completely  succumbed  and  either  went  into  voluntary 
liquidation  or  failed.  The  year  1879  was  the  most  disas- 
trous of  all,  the  largest  number  of  failures  having  taken 
place  in  that  year.  All  told,  five  banks  failed  during  this 
period  in  the  provinces  of  Ontario  and  Quebec,  one  in  New 
Brunswick,  and  two  in  Nova  Scotia.  The  paid-up  capital 
of  the  banks  reporting  to  the  government,  which  in  1875 
had  reached  a  total  of  $66,800,225,  had  decreased  by  1881 
to  $59,677-363-     (Breckenridge,  App.  i.) 

The  unfortunate  experiences  of  1879  and  the  years  im- 
mediately preceding  it  are  chiefly  responsible  for  the  modi- 
fications made  in  the  bank  act  by  the  revision  of  May  7, 
1880.  Though  all  of  the  banks  which  failed  ultimately 
paid  their  note-holders  in  full,  with  one  exception,  and 
most  of  them  paid  a  large  percentage  of  the  debts  owed  to 
their  other  creditors,  in  1880,  at  the  time  this  revision  took 
place,  the  prospects  for  meeting  any  large  proportion  of 
their  obligations  were  gloomy  in  the  cases  of  most  of  the 
banks.  Agitation  for  a  radical  modification  of  the  banking 
system  was,  therefore,  revived,  and  it  was  again  proposed 
that  the  system  in  vogue  in  the  United  States  should  be  in- 
troduced. The  bankers  successfully  opposed  this  scheme, 
however,  and  also  convinced  the  government  that  it  would 
not  be  profitable  to  provide  for  the  inspection  of  Canadian 


Banking  in  Canada  213 

banks  by  public  authority.  They  argued  that  on  account  of 
the  size  of  the  banks,  the  large  number  of  their  branches, 
and  the  variety  of  commercial  paper  which  they  held,  it 
would  be  impossible  for  any  public  official  to  make  an  ex- 
amination of  a  Canadian  bank  which  would  be  thorough 
enough  to  reveal  its  actual  condition.  They  further  argued 
that  the  fancied  security  which  a  favorable  report  of  such 
an  officer,  based  upon  inadequate  knowledge,  would  pro- 
duce, would  result  in  bad  banking  and  ultimately  in  disaster. 
The  only  successful  supervision  and  inspection  for  such 
banks,  they  claimed,  must  come  from  the  proper  organiza- 
tion and  skillful  manning  of  the  banks  themselves. 

The  banks  recommended  that  note-holders  should  be 
secured  by  a  first  lien  upon  all  the  assets  of  the  bank,  and 
that  the  use  of  the  title  "bank"  in  any  form  should  be  pro- 
hibited to  any  except  incorporated  banks.  An  act  which 
was  finally  passed  May  7,  1880,  incorporated  these  rec- 
ommendations and  in  addition  raised  the  limit  of  the  lowest 
denomination  of  bank-notes  which  were  thereafter  per- 
mitted to  be  issued  from  $4  to  $5,  and  required  that  any 
bank  upon  the  request  of  one  of  its  customers  must  pay  out 
one-  and  two-dollar  Dominion  notes  to  the  extent  of  at  least 
$50.  Considerable  modifications  and  improvements  were 
also  made  in  the  clauses  of  the  act  pertaining  to  warehouse 
receipts.  Two  years  later  some  further  slight  amendments 
were  made,  the  chief  ones  being  that  the  penalty  for  viola- 
tion of  the  law,  which  had  previously  been  forfeiture  of 
charter,  was  in  some  cases  changed  to  a  money  indemnity, 
and  instead  of  prohibiting  to  any  but  incorporated  banks  the 
use  of  the  title  banking  company,  banking  house,  etc,  such 
institutions  were  prohibited  from  the  use  of  these  titles 
except  when  they  added  the  word  "unincorporated." 

The  decade  now  under  consideration  is  also  interesting 
on  account  of  certain  legislation  passed  with  reference  to 


214  Money  and  Banking 

the  Dominion  notes.  In  1872  a  modification  was  made  in 
the  amount  and  kind  of  security  to  be  held  for  these  notes. 
Previously,  for  all  notes  issued  in  excess  of  $9,000,000, 
dollar  for  dollar  of  specie  was  held.  It  was  now  made  law- 
ful to  hold  for  this  excess  not  less  than  35  per  cent,  in  specie. 
In  1875  a  still  further  modification  was  made  to  the  effect 
that  for  any  excess  above  $9,000,000  and  less  than  $12,- 
000,000  50  per  cent,  should  be  held  in  specie,  and  for  all  sums 
in  excess  of  $12,000,000,  dollar  for  dollar  in  specie.  In  1876 
the  laws  regarding  the  Dominion  notes  were  extended  to 
the  provinces  of  Prince  Edward  Island,  British  Columbia, 
and  Manitoba,  and  branch  offices  of  the  Receiver-General 
for  the  administration  of  the  note  system  were  established 
at  Charlottetown,  Victoria  and  Winnipeg,  The  act  of  1880 
raised  the  limit  of  notes  to  be  only  partially  covered  by 
specie  to  $20,000,000.  Not  less  than  15  per  cent,  of  this 
amount  was  to  be  covered  by  gold,  not  less  than  25  per  cent, 
by  gold  and  Dominion  securities  guaranteed  by  the  United 
Kingdom,  and  the  remaining  75  per  cent,  or  less  by  Do- 
minion debentures  issued  for  the  purpose. 

11.  The  decade  1880  to  1890  and  the  revision  of  1890. — 
The  decade  1880  to  1890  resembles  its  predecessor  in  that 
the  early  part  of  the  period  was  characterized  by  bank  ex- 
pansion and  the  latter  by  losses  and  failures.  Neither  the 
amount  of  the  expansion  nor  of  the  subsequent  depression 
was  so  great  or  so  serious  as  in  the  preceding  decade,  and 
considering  the  period  as  a  whole,  there  was  an  increase 
rather  than  a  diminution  of  banking  resources.  During  the 
period  four  new  banks  were  established  in  the  provinces  of 
Ontario  and  Quebec,  and  one  in  the  new  province  of  Mani- 
toba. Owing  to  agitation  for  increased  loan  facilities  for 
farmers,  there  was  a  large  increase  in  the  number  of 
branches  estabHshed  in  rural  districts  and  especially  in  the 
new  western  provinces.     Manitoba  proved  to  be  the  chief 


Banking  in  Canada  215 

center  of  expansion  during  this  period.  A  veritable  boom 
of  large  dimensions  struck  the  province  in  the  early  part 
of  the  period  and  was  followed  by  the  usual  crash  in  the 
latter  part.  This  was  the  chief  single  cause  for  the  bank 
losses  and  failures  which  characterized  the  later  8o's.  x\s 
in  the  previous  decade,  several  banks  wrote  off  losses  and 
received  authority  to  diminish  their  capitals.  Four  banks 
failed  or  liquidated  in  the  provinces  of  Ontario  and  Quebec, 
one  in  New  Brunswick,  and  one  in  Nova  Scotia. 

The  experiences  of  this  period  brought  out  clearly  several 
defects  in  the  existing  banking  system.  Whenever  a  bank 
failed  its  notes  at  once  fell  to  a  discount,  even  though  there 
was  reasonable  certainty  of  its  ability  ultimately  to  pay 
them  in  full.  Existing  holders,  who  were  obliged  to  realize 
upon  them  at  once,  suffered  loss  in  consequence,  A  further 
defect  was  seen  in  the  fact  that  the  banks  had  not  made  pro- 
vision for  the  redemption  of  their  notes  in  all  parts  of  the 
Dominion  and  were  not  compelled  to  do  so  by  law,  and  in 
consequence  their  notes  were  not  everywhere  at  par.  The 
failures  of  this  and  the  preceding  decade  had  also  shown 
that  a  paid-up  capital  of  $100,000  was  not  sufficient  in  all 
cases  to  guarantee  the  genuineness  of  the  enterprise. 

These  defects  were  patent  to  the  bankers  themselves,  and 
even  before  the  period  for  revision  arrived  a  movement 
was  started  among  them  to  increase  the  number  of  redemp- 
tion agencies  and  in  other  ways  to  secure  the  maintenance 
of  the  notes  at  par  throughout  the  Dominion.  Mutual 
agreements  regarding  the  reception  of  each  other's  notes 
were  made  by  bankers  in  various  localities,  and  by  discus- 
sion and  careful  thought  they  provided  material  for  the 
formulation  of  a  revision  act  in  1890.  The  chief  changes 
made  by  this  act  were  the  introduction  of  a  bank  circulation 
redemption  fund,  the  establishment  of  numerous  redemp- 
tion agencies  in  the  chief  commercial  centers  of  the  Do- 


2i6  Money  and  Banking 

minion,  the  increase  in  the  minimum  capital  requirement, 
and  the  enlargement  and  more  careful  definition  of  the  loan 
powers  of  the  banks. 

"The  Bank  Circulation  Redemption  Fund"  was  intro- 
duced primarily  for  the  purpose  of  preventing  the  de- 
preciation of  bank-notes  between  the  date  of  suspension 
and  that  of  the  liquidation  of  the  notes  of  a  failed  bank. 
The  law  provided  that  each  bank  must  maintain  with  the 
Minister  of  Finance  and  Receiver-General  a  fund  equal 
to  five  per  cent,  of  the  average  of  their  notes  in  circulation 
forthetwelve  monthspriortotheprecedingfirstof  July,  which 
fund  should  be  held  solely  for  the  purpose  of  redeeming 
the  notes  of  banks  which  were  in  a  state  of  suspension. 
Upon  this  fund  the  government  pays  three  per  cent,  interest 
to  the  bank.  In  case  of  suspension  the  bank  is  required  to  pay 
interest  upon  its  notes  at  the  rate  of  six  per  cent,  up  to  the  date 
named  for  their  redemption.  If  after  two  months  from 
the  date  of  suspension  the  bank's  liquidators  are  not  pre- 
pared to  redeem  the  notes,  the  Minister  of  Finance  is 
authorized  to  redeem  them  out  of  the  fund,  the  notes  so 
redeemed  having  the  same  rights  against  the  estate  of  the 
bank  as  other  notes.  In  case  the  payments  by  the  Minister 
of  Finance  on  account  of  redemption  exceed  the  contribu- 
tions of  the  suspended  bank  to  the  fund,  the  other  banks 
shall  be  called  upon  to  recoup  the  fund  pro  rata  to  the 
amounts  to  their  credit,  such  contributions,  however,  not  to 
exceed  for  any  oneyear  one  per  cent,  of  the  average  circulation. 

In  order  to  maintain  bank  notes  at  par  in  every  part  of 
the  Dominion,  provision  was  made  for  the  establishment 
by  each  bank  of  redemption  agencies  at  Halifax,  St.  John's, 
Charlottetown,  Montreal,  Toronto,  Winnepeg  and  Vic- 
toria. Redemption  was  to  take  place  on  demand  at  these 
agencies  as  well  as  at  the  head  office  of  the  bank  and  any 
other  places  designated. 


Banking  in  Canada  217 

Regarding  capital,  the  requirement  made  in  this  act  was 
that  no  new  banks  should  be  organized  without  a  subscribed 
capital  of  at  least  $500,000  and  a  paid-up  capital  of  not 
less  than  $250,000.  The  general  powers  and  business  of  a 
bank  are  defined  in  the  act  in  the  following  terms,  (Section 
64): 

"A  bank  may  open  branches,  agencies  and  offices,  and 
may  engage  in  and  carry  on  business  as  a  dealer  in  gold  and 
silver  coin  and  bullion,  and  it  may  deal  in,  discount,  and 
lend  money,  and  make  advances  upon  the  security  of,  and 
may  take  as  collateral  security  for  any  loan  made  by  it,  bills 
of  exchange,  promissory  notes  and  other  negotiable  securi- 
ties or  the  stocks,  bonds,  debentures  and  obligations  of 
municipal  and  other  corporations,  whether  secured  by  mort- 
gage or  otherwise,  or  Dominion,  provincial,  British,  foreign 
and  other  public  securities,  and  it  may  engage  in  and  carry 
on  such  business  generally  as  appertains  to  the  business 
of  banking;  but,  except  as  authorized  by  this  act,  it  shall 
not,  either  directly  or  indirectly,  deal  in  the  buying  or 
selling  or  bartering  of  goods,  wares  and  merchandise,  or 
engage  or  be  engaged  in  any  trade  or  business  whatsoever; 
and  it  shall  not,  either  directly  or  indirectly,  purchase  or 
deal  in  or  lend  money,  or  make  advances  upon  the  security 
or  pledge  of  any  share  of  its  own  capital  stock  or  of  the 
capital  stock  of  any  bank,  and  it  shall  not,  either  directly 
or  indirectly,  lend  money  or  make  advances  upon  the  se- 
curity, mortgage  or  hypothecation  of  any  land,  tenements 
or  immovable  property,  or  of  any  ships  or  other  vessels, 
or  upon  security  of  any  goods,  wares  or  merchandise." 

Succeeding  sections  authorize  the  bank  to  hold  various 
forms  of  real  property  when  they  come  into  its  hands  in  the 
process  of  enforcing  the  payment  of  the  debts  due  to  it. 
Sections  y^^  and  74  authorize  the  advance  of  money  on 
ordinary  warehouse  receipts  and  bills  of  lading,  and  the 


2i8  Money  and  Banking 

act  specifies  in  considerable  detail  the  methods  by  which 
such  loans  shall  be  effected. 

Another  interesting  section  of  the  act  pertains  to  the 
rate  of  interest  which  may  be  charged.  Banks  are  au- 
thorized to  take  any  rate  not  over  7%,  and  are  not  subject  to 
any  penalty  or  forfeiture  for  usury.  In  discounting  bills 
payable  at  its  own  branches,  a  bank  may  not  charge  any 
addition  of  interest  or  commission  beyond  the  following 
rates:  For  30  day  bills  ys  of  1%,  for  bills  running  over 
30  days  and  under  60  days,  %  oi  1%,  over  60  but  under  90 
days,  ^  of  1%,  for  90  and  over,  1/2  of  1%.  For  bills  not 
payable  at  points  where  it  has  branches,  it  may  charge  not 
to  exceed  ^  of  1%.  Another  section  prohibits  the  use  of  the 
titles  bank,  banking  company,  etc.,  except  as  authorized  by 
the  terms  of  this  act. 

12.  Recent  history. — The  act  just  described  added  the 
finishing  touches  to  the  Canadian  banking  system.  In  the 
revision  of  1900  no  modifications  of  principle  were  intro- 
duced, amendments  taking  the  form  rather  of  improvement 
of  details.  Regarding  note  issues  the  act  provided  that  no 
bank  in  a  condition  of  suspension  shall  issue  or  re-issue  its 
notes,  and  that  the  notes  redeemed  from  the  fund  after  the 
contribution  of  the  suspended  bank  has  been  exhausted 
shall  bear  interest  at  three  per  cent,  until  repaid  out  of  the 
assets  of  the  bank.  It  further  authorized  banks  to  issue  notes 
in  denominations  of  one  pound  sterling  and  multiples  there- 
of in  any  other  British  possession  than  Canada,  such  notes 
to  be  redeemable  at  the  office  or  agency  of  the  bank  in  such 
colony  or  possession.  Provision  was  also  made  for  the  pur- 
chase by  one  bank  of  the  assets  of  another  and  for  the 
making  of  loans  on  security  of  standing  timber  and  on  the 
rights  or  licenses  held  by  persons  to  cut  or  remove  such 
timber. 

An  interesting  change  was  introduced  by  the  act  of  1900 


Banking  in  Canada  219 

in  the  methods  of  winding  up  and  administering  the  affairs 
of  a  suspended  bank.  By  an  act  passed  by  this  same  legisla- 
ture the  Canadian  Bankers'  Association  was  incorporated, 
and  the  bank  act  provided  for  the  appointment  of  a  curator 
by  this  Association  to  take  charge  of  the  affairs  of  a  sus- 
pended bank.  It  further  granted  to  this  Association  au- 
thority to  supervise  the  making,  delivery  and  destruction 
of  bank-notes. 

The  Canadian  Banker's  Association,  thus  given  a  part  in 
the  administration  of  the  banking  system  of  the  country, 
in  its  membership  includes  nearly  all  the  banks,  and  includes 
among  its  main  functions  the  publication  of  a  periodical 
known  as  the  Journal  of  the  Canadian  Bankers'  Associa- 
tion, and  the  provisions  of  means  for  the  education  and 
training  of  bank  officials.  This  Association  has  already 
done  admirable  work  and  is  destined  to  play  a  constantly 
increasing  role  in  the  banking  history  of  the  Dominion. 

REFERENCES 

The  chief  works  on  the  history  of  banking  in  Canada  are  Brecken- 
ridge,  The  Canadian  Banking  System,  1817-1890,  Pubs.  Amer.  Econ. 
Asn.  vol.  X.  numbers  i,  2  and  3,  and  The  History  of  Banking  in  Can- 
ada, published  by  the  National  Monetary  Commission;  Walker,  Bank- 
ing in  Canada,  in  vol..  in  of  History  of  Banking  in  all  the  leading 
Nations ;  and  the  following  articles  by  Professor  Adam  Shortt  pub- 
lished in  the  Journal  of  the  Canadian  Bankers  Association :  The  Early 
History  of  Canadian  Banking,  vols,  iv  and  v;  Canadian  Currency 
and  Exchange  under  French  Rule,  vols,  v  and  vi ;  and  The  History 
of  Canadian  Currency,  Banking  and  Exchange,  vols,  vii  to  xiv.  The 
Journal  of  the  Canadian  Bankers'  Association  published  quarterly 
since  1893  is  the  best  source  of  information  on  all  phases  of  Canadian 
banking  history  and  practice.  See  also  Conant's  Modern  Banks  of 
Issue,  ch.  xvi ;  and  White,  ch.  xv. 


CHAPTER  XII 
BANKING  IN  ENGLAND 

During  the  middle  ages  and  early  modern  times  banking 
was  carried  on  in  England  at  first  chiefly,  if  not  exclusive- 
ly, by  Jews  and  later  by  Italians  called  Lombards,  and  later 
still  by  the  so-called  goldsmiths  or  workers  and  dealers  in 
the  precious  metals.  There  were  no  incorporated  institu- 
tions engaged  in  this  business  previous  to  the  establishment 
of  the  Bank  of  England  in  1694.  These  early  private 
bankers  were  located  chiefly  in  London.  In  the  country  vil- 
lages and  smaller  provincial  towns  banking  was  not  much 
developed  before  the  middle  of  the  eighteenth  century. 

I.  The  early  history  of  the  Bank  of  England. — The  Bank 
of  England  was  incorporated  by  Parliament  in  pursuance 
of  a  plan  devised  by  a  Scotchman  named  Wm.  Patterson,  an 
important  feature  of  which  was  a  loan  to  the  government  of 
£  1 ,200,000  at  seven  per  cent,  interest.  On  account  of  the  great 
need  for  funds  caused  by  the  war  which  William  and  Mary 
were  then  waging  against  the  exiled  Stuarts  and  their  con- 
tinental backers,  the  loan  of  such  a  sum  at  so  favorable 
a  rate  of  interest,  and  the  prospect  of  further  financial  as- 
sistance from  the  new  institution,  were  inducements  suffi- 
cient to  secure  the  assent  of  Parliament  to  certain  special 
privileges  to  be  enjoyed  by  the  incorporators.  These  were : 
limited  liability,  that  is  liability  on  the  part  of  each  stock- 
holder for  the  debts  of  the  bank  only  to  the  extent  of  his 
holdings  of  stock;  and  the  use  of  the  government  balances. 

The  right  to  issue  notes  was  also  specifically  granted  in 
the  original  charter,  but  was  not  prohibited  to  other  in- 

220 


Banking  in  England  221 

stitutions  or  persons.  The  bank,  however,  coveted  this 
also  as  a  special  privilege  and  in  1697  secured  the  passage 
of  an  act  which  bound  Parliament  not  to  grant  banking 
privileges  to  any  other  institution  during  the  continuance 
of  her  charter.  The  terms  of  this  act,  not  being  sufficiently 
clear,  and  attempts  to  infringe  upon  this  privilege  having 
been  made,  another  act  was  passed  in  1708,  the  most  im- 
portant clause  of  which  was  as  follows: 

"That  during  the  continuance  of  the  said  Corporation 
of  the  Governor  and  Company  of  the  Bank  of  England, 
it  shall  not  be  lawful  for  any  body  politic  or  corporate  what- 
soever, erected  or  to  be  erected  (other  than  the  said  Gov- 
ernor and  Company  of  the  Bank  of  England),  or  for  any 
other  persons  whatsoever  united  or  to  be  united  in  cove- 
nants or  partnerships,  exceeding  the  number  of  six  persons, 
in  that  part  of  Great  Britain  called  England,  to  borrow, 
owe  or  take  up  any  sum  or  sums  of  money  on  their  bills 
or  notes  payable  at  demand,  or  at  less  time  than  six  months 
from  the  borrowing  thereof." 

This  act  left  private  bankers  and  partnerships  of  less 
than  six  persons  free  to  issue  notes  and  to  carry  on  all 
other  branches  of  the  banking  business,  and  the  records  of 
the  Bank  of  England  during  the  first  century  of  her  history 
indicate  that,  in  spite  of  her  privileges,  these  private  bank- 
ers more  than  held  their  own  in  competition  for  the  busi- 
ness of  merchants  and  other  private  individuals.  During 
all  this  period  the  balances  due  the  government  constituted 
the  bank's  chief  liability,  and  loans  to  the  government  her 
chief  resource.* 

2.  Country  banking  and  the  act  of  1826. — About  the 
middle  of  the  eighteenth  century  private  bankers  began  to 
appear  in  the  provincial  towns.  By  the  end  of  the  century 
three  hundred  or  more  were  in  existence  and  during  the 

*  For  statistics  see  Lawson's  History  of  Banking,  pp.  44  and  45. 


222  Money  and  Banking 

next  few  years  their  numbers  increased  very  rapidly.  These 
bankers  issued  notes  freely,  before  1777  in  such  denomina- 
tions as  they  desired,  frequently  below  one  pound,  and  at 
times,  if  not  ordinarily,  were  far  from  conservative  and 
discriminating  in  making  loans  and  in  granting  credit  to 
the  various  enterprises  then  competing  for  public  favor. 
Especially  during  the  Napoleonic  wars  and  the  years  im- 
mediately succeeding,  when  specie  payments  were  sus- 
pended, they  greatly  abused  their  privileges  and  contributed 
to  the  speculation  which  preceded  the  crisis  of  1825.  The 
failure  of  many  of  them  at  this  time  and  during  the  period 
of  depression  which  followed,  revealed  the  fact  that  they 
were  greatly  undercapitalized  and  sometimes  entirely  with- 
out capital  resources  and  that  the  property  of  their  proprie- 
tors was  inadequate  to  meet  their  obligations. 

The  issue  of  notes  of  low  denominations  was  also  seen 
to  have  been  a  dangerous  privilege,  these  notes  having  quite 
generally  taken  the  place  of  coin  in  the  circulation. 

A  widespread  demand  for  reform  followed,  resulting  in 
1826  in  a  new  law  which  provided  among  other  things  that 
banks  with  an  unlimited  number  of  partners  might  be 
established  in  any  place  in  England  distant  more  than  sixty- 
five  miles  from  London  and  that  the  Bank  of  England 
might  establish  branches  in  any  place  in  England.  The  pur- 
pose of  this  law  was  the  encouragement  of  the  establish- 
ment in  provincial  towns  of  banks  with  a  larger  and  finan- 
cially stronger  proprietary  than  was  previously  possible 
under  the  limitations  imposed  by  the  act  of  1708.  The 
privilege  of  extension  into  the  provinces  granted  to  the  Bank 
of  England  was  designed  in  part  to  compensate  her  for 
the  further  limitations  imposed  on  her  monopoly  and  in 
part  to  give  the  provinces  the  advantages  of  a  closer  and 
more  direct  contact  with  her. 

Taking  advantage  of  the  provisions  of  the  act,  the  Bank 


Banking  in  England  223 

of  England  established  branches  in  Gloucester,  Manchester 
and  Swansea  in  1826,  in  Birmingham,  Liverpool,  Bristol 
and  Leeds  in  1827,  in  Newcastle  in  1828,  in  Hull  and  Nor- 
wich in  1829,  and  in  Portsmouth  in  1834. 

Provincial  joint-stock  banks  were  incorporated  at  first 
in  small  numbers  only,  but  after  1833  more  rapidly.  In 
the  year  1836  upwards  of  forty  were  established,  and  by 
1844  their  number  exceeded  one  hundred. 

After  the  passage  of  the  act  of  1826  the  number  of 
private  banks  decreased  from  over  four  hundred  to  less 
than  three  hundred  in  1844,  some  of  them  having  been 
absorbed  by  the  new  joint-stock  institutions,  and  others 
forced  to  the  wall  by  their  competitors  or  by  inherent  weak- 
nesses. The  new  banks  were  not  immune  from  failure 
and  their  methods  differed  little,  if  any,  from  those  of  their 
private  competitors.  Their  chief  superiority  consisted  in 
their  greater  ability  to  meet  their  obligations  in  case  of 
failure,  the  number  of  their  proprietors  being  greater  and 
each  one  being  responsible  for  the  debts  of  the  bank  to  the 
full  extent  of  his  property. 

3.  The  first  banks  of  deposit. — In  1834  another  type  of 
joint-stock  bank  appeared  in  the  city  of  London,  one  des- 
tined to  prevail  and  to  become  second  in  importance  only 
to  the  Bank  of  England.  This  was  the  incorporated  bank 
of  deposit  without  the  right  to  issue  notes  and  catering  to 
the  varying  and  growing  needs  of  commerce  in  all  of  its 
branches  instead  of  to  the  landlord  and  official  classes. 
The  London  and  Westminster  Bank,  opened  for  business 
March  10,  1834,  was  the  first  of  this  type  to  be  established. 
Its  founder  was  a  Mr.  Gilbart  who  believed  that  the  clauses 
of  the  various  charters  of  the  Bank  of  England  defining 
her  exclusive  privileges  did  not  prohibit  this  kind  of  a  joint- 
stock  bank  even  in  the  city  of  London,  and  the  surround- 
ing territory.     This  interpretation  was  adopted  by  Parlia- 


224  Money  and  Banking 

ment  and  expressed  in  a  clause  of  the  bank  charter  act  of 
1833  which  reads  as  follows:  "Such  banking  company  con- 
sisting of  more  than  six  persons  may  carry  on  their  trade 
in  London  or  within  sixty-five  miles  thereof,  provided  they 
do  not  borrow,  owe,  or  take  up  in  England,  any  sums  of 
money  on  their  notes  payable  on  demand  or  at  any  time  less 
than  six  months  from  the  borrowing  thereof,  during  the 
continuance  of  the  privileges  granted  by  this  act." 

The  practicability  of  successfully  conducting  a  banking 
business  on  the  basis  of  checking  accounts  instead  of  note 
issues  had  already  been  demonstrated  by  the  private  bankers 
of  London  who  had  ceased  to  issue  notes  many  years  be- 
fore and  whose  deposit  and  exchange  business  had  become 
sufficiently  important  even  in  1775  to  warrant  the  estab- 
lishment of  a  Clearing  House.  The  London  and  Westmin- 
ster Bank  differed  from  its  joint-stock  provincial  predeces- 
sors, established  in  accordance  with  the  provisions  of  the 
act  of  1826,  not  only  in  that  it  did  not  issue  notes,  but  in 
that  it  had  a  relatively  large  paid-up  and  a  still  larger  sub- 
scribed capital,  and  it  differed  from  the  private  banks  of 
London  not  only  in  the  fact  of  incorporation,  but  in  that  it 
catered  to  the  needs  of  a  new  and  different  constituency,  the 
ordinary  tradesman  and  people  of  moderate  and  small  means. 

Other  banks  of  the  London  and  Westminster  type  early 
established  in  London  were  the  London  Joint-Stock  Bank, 
opened  in  1836,  and  the  Union  Bank  of  London,  The  Lon- 
don and  County  Bank  and  the  Commercial  Bank  of  Lon- 
don, opened  in  1839.  The  Marlybone  Bank  started  in  1836 
and  the  Metropolitan  Bank  started  in  1839  of  this  same 
type  were  badly  managed  and  failed  in  1841. 

4.  Discount  brokerage  as  a  special  branch  of  banking. — 
Early  in  the  nineteenth  century  discount  brokerage  became 
an  independent  branch  of  business  in  London  and  has  con- 
tinued as  such  to  the  present  day.    In  1807  a  Mr.  Overend 


Banking  in  England  225 

entered  into  partnership  with  two  other  gentlemen  for  the 
establishment  of  a  firm  for  the  purpose  of  serving  as  inter- 
mediaries between  merchants  who  drew  bills  of  exchange 
and  bankers  who  discounted  them.  Mr.  Overend  had  pre- 
viously become  an  expert  in  this  business  through  his  con- 
nection with  a  private  banking  firm  in  Norwich,  and  the  new 
firm  developed  it  to  large  proportions  and  made  it  an  impor- 
tant part  of  the  financial  machinery  of  the  great  metropolis. 
Other  private  firms  entered  the  field  and  in  1855  the  Na- 
tional Discount  Company  was  incorporated  for  this  pur- 
pose. The  discount  firm  or  company  buys  or  sells  bills  on 
commission  or  deals  in  them  as  a  grocer  does  in  tea,  keep- 
ing such  a  portion  of  its  own  capital  as  it  deems  best  in- 
vested in  this  form  or  combines  both  branches  of  the 
business.  London  merchants  may  and  frequently  do  sell 
their  bills  to  a  discount  firm  instead  of  to  a  joint-stock  or 
private  bank,  and  banks  which  desire  investments  of  this 
kind  normally  go  to  the  discount  firms  for  them  instead 
of  buying  direct  from  the  issuers. 

5.  The  bank  act  of  1844. — In  the  years  1836  and  1839  Eng- 
land suffered  from  panics,  each  of  which  was  preceded  by 
rash  speculation,  accompanied  by  severe  money  stringency 
and  followed  by  business  depression.  Much  of  previous 
legislation  pertaining  to  banks  had  been  inspired  by  the 
belief  that  these  institutions  w^ere  largely  responsible  for 
crises,  and  by  the  hope  that  proper  legal  regulation  of  the 
banking  business  would  prevent  these  disastrous  occurrences. 
In  addition  to  the  enactments  of  1826  and  1833  authorizing 
the  establishment  of  joint-stock  banks  of  issue  in  the  prov- 
inces, and  banks  of  discount  in  London,  there  had  been 
others  prohibiting  the  circulation  of  bank  notes  of  denomi- 
nations below  five  pounds  and  making  the  notes  of  the 
Bank  of  England,  so  long  as  they  were  paid  on  demand  in 
legal  coin,  legal  tender,  except  as  between  the  bank  and  the 


226  Money  and  Banking 

public.  The  Bank  of  England  had  also  adopted  the  policy 
of  keeping  in  its  vaults  a  coin  reserve  equal  to  at  least 
one-third  of  its  demand  obligations,  and  of  regulating  its 
note  issues  in  accordance  with  the  state  of  the  foreign  ex- 
changes, increasing  them  when  the  exchanges  were  favor- 
able and  decreasing  them  under  opposite  conditions.  The 
crises  of  1836  and  1839  convinced  Parliament  of  the  inad- 
equacy of  these  measures  and  of  the  desirability  of  a  more 
efficient  and  direct  regulation  of  note  issues  by  the  govern- 
ment, the  majority  apparently  believing  that  the  inability 
of  the  Bank  of  England  under  existing  laws  properly  to 
regulate  such  issues  was  the  chief  cause  of  these  crises. 

The  act  of  1844,  also  known  as  Peel's  act,  was  the  rem- 
edy devised  by  Parliament.  It  created  in  the  Bank  of  Eng- 
land an  issue  department  and  a  banking  department,  the 
former  to  have  exclusive  charge  of  the  issue  of  notes  and 
the  latter  of  all  other  branches  of  the  bank's  business.  It 
authorized  the  transfer  to  the  issue  department  of  govern- 
ment and  other  high  class  securities  held  by  the  bank  to 
the  amount  of  £14,000,000  to  serve  as  backing  for  a  like 
amount  of  notes  and  permitted  the  issue  of  notes  in  excess 
of  that  amount  on  condition  only  that  an  equal  amount  of 
coin  be  kept  in  the  vaults  for  their  redemption,  or  that  the 
Cabinet  authorize  an  increase  against  securities  to  take  the 
place  of  notes  of  joint-stock  or  private  banks  authorized 
by  the  act,  but  afterward  abandoned.  Fourteen  million 
pounds  being  the  estimated  amount  of  Bank  of  England 
notes  normally  required  to  supplement  the  notes  of  the 
private  and  joint-stock  banks,  and  the  coin  normally  in  cir- 
culation in  order  that  the  needs  of  the  country  for  hand- 
to-hand  money  might  be  satisfied,  it  was  intended  that  the 
chief  business  of  the  issue  department  should  be  to  exchange 
notes  for  coin  and  vice  versa  as  one  form  of  currency 
rather  than  the  other  should  be  desired  by  the  public. 


Banking  in  England  227 

At  this  time  two  hundred  and  seven  private  and  seventy- 
two  joint-stock  banks  were  issuing  notes  subject  to  no 
limitation  as  to  the  amount  they  might  put  into  circulation 
or  the  character  of  their  assets.  The  Act  of  1844  changed 
this  situation  by  fixing  as  the  maximum  limit  of  the  issues 
of  such  banks  the  amount  of  notes  they  had  outstanding 
on  April  12,  1844,  and  by  forbidding  the  issue  of  notes  by 
any  private  or  joint-stock  bank  that  should  be  organized  in 
the  future.  It  provided  further  that  in  case  any  of  these 
banks  should  relinquish  its  right  to  issue  notes,  it  could  not 
again  resume,  but  that,  in  that  case,  the  Cabinet,  by  an 
order  in  Council,  might  authorize  the  Bank  of  England 
to  increase  its  issues  against  securities  by  an  amount  two- 
thirds  as  great  as  that  thus  relinquished. 

After  1844  the  number  of  private  and  joint-stock  banks 
of  issue  gradually  decreased,  partly  doubtless  because  of 
the  limitations  imposed  upon  them  by  the  Peel  act,  but 
chiefly  because  of  the  competition  and  better  adaptation  to 
the  needs  of  the  times  of  joint-stock  banks  of  the  London 
and  Westminster  type.  No  longer  able  to  enlarge  their 
business  through  expansion  of  note  issues,  and  being  for- 
bidden access  to  London  and  the  surrounding  territory  so 
long  as  they  continued  to  issue  the  quota  assigned  by  the 
act  of  1844,  the  joint-stock  banks  of  issue  had  much  to 
gain  and  little  to  lose  by  relinquishing  their  issues  and  re- 
organizing under  the  other  form.  This  was  particularly 
true  after  1858  when  the  privilege  of  limited  liability  and 
various  other  advantages  were  extended  to  banking  cor- 
porations of  the  London  and  Westminster  type.  As  we 
have  already  noted,  a  decline  in  the  number  of  private  banks 
had  set  in  before  the  passage  of  the  Peel  act,  the  efl'ect  of 
which  doubtlessly  was  to  hasten  the  rapidity  of  this  move- 
ment. The  following  table  shows  the  number  of  each  class 
of  banks  registered  on  the  first  of  January  of  each  of  the 
years  indicated: 


228 


Money  and  Banking 


Year 


1844 
1849 

1853 
1858 
1863 
1868 

1873 
1878 
1883 
1888 

1893 
1898 

1903 

1908 

1909 


Private  Banks 
of  Issue 


211 
182 
169 

129 
119 
IIO 
103 

68 

38 
19 
12 
II 


Joint-Stock 
Banks  of  Issue 


72 
66 
66 

63 
63 
56 
56 
52 
46 
42 
37 
31 
21 

IS 
II 


As  the  issues  of  private  and  joint-stock  banks  have 
been  relinquished,  the  Cabinet,  from  time  to  time,  in  pur- 
suance of  the  authority  conferred  by  the  act  of  1844,  has 
added  to  the  amount  of  notes  the  Bank  of  England  is  per- 
mitted to  issue  against  securities.  The  following  table*  in- 
dicates the  dates  of  the  Council  orders  and  the  amounts  of 
the  increase  in  each  case: 


The  Peel  act, 
Council  Order 
Council  Order 
Council  Order 
Council  Order 
Council  Order 
Council  Order 
Council  Order 
Council  Order 
Council  Order 
Council  Order 


1844,  limited  the  issues  against  securities  to,  £1 
Dec.      7,  1855,  increased  the  limit  by 

10,  1 86 1,  further  increased  the  limit  by 

21,  1866,  further  increased  the  limit  by 
1,1881,  further  increased  the  limit  by 

15,1887,  further  increased  the  limit  by 
8,  1889,  further  increased  the  limit  by 

29,  1894,  further  increased  the  limit  by 
March  3,  1900,  further  increased  the  limit  by 
Aug.  II,  1902,  further  increased  the  limit  by 
Aug.  10,  1903,  further  increased  the  limit  by 


July 
Feb. 
Apr. 
Sept 
Feb. 
Jan. 


4,000,000 
475,000 
175,000 
350,000 
750,000 
450,000 
250,000 
350,000 
975,000 
400,000 
275,000 


♦Quoted  from  Bankers  Mag.,  Jan.  1904,  p.  29. 


£18,450,000 


Banking  in  England  229 

6.  The  joint-stock  banks  and  concentration. — During 
their  early  history  the  non-issuing  joint-stock  banks,  that  is 
Banks  of  the  London  and  Westminster  type,  were  bitterly 
opposed  by  the  Bank  of  England  and  the  private  banks  of 
London  and  many  obstacles  were  placed  in  the  way  of  their 
development.  Gradually,  however,  by  resort  to  the  courts 
and  to  Parliament  they  not  only  won  the  right  to  existence, 
but  a  satisfactory  legal  status.  Since  1857  they  have  en- 
joyed the  right  of  registration  under  the  so-called  com- 
panies' acts  which  confer  the  privilege  of  limited  liability 
and  other  advantages  of  great  value.  By  studying  the  finan- 
cial needs  of  commerce  and  industry  and  catering  to  them 
in  a  spirit  of  helpfulness  and  liberality,  they  have  greatly 
enlarged  the  functions  of  banks,  extended  their  operation 
to  new  classes  of  the  population  and  won  for  themselves 
the  lion's  share  of  this  growing  business. 

According  as  their  offices  are  located  exclusively  in  Lon- 
don, in  both  London  and  the  provinces,  or  exclusively  in 
the  provinces,  they  are  commonly  designated  as  Metropoli- 
tan, Metropolitan  and  Provincial,  or  Provincial  Banks.  A 
typical  bank  in  any  of  these  groups  has  a  main  office  and 
several  branches.  The  London  and  Westminster,  for  ex- 
ample, has  its  head  office  at  41  Lothbury,  E.  C,  a  west 
end  office  at  i  St.  James  Square,  S.  W.,  and  thirty-five 
branch  offices  in  other  parts  of  London.  The  London  City 
and  Midland  Bank,  of  the  Metropolitan  and  Provincial 
group,  has  its  main  office  in  Threadneedle  St.,  seventy  or 
more  branches  in  London  and  its  suburbs,  and  four  hun- 
dred or  more  offices  in  the  provinces.  The  Manchester 
and  Liverpool  District  Banking  Company,  belonging  to  the 
Provincial  group,  has  its  head  office  in  Manchester  and 
more  than  one  hundred  offices  elsewhere,  including  one  in 
London. 

For  many  years  the  leading  institutions  of  these  groups 


230  Money  and  Banking 

have  been  growing  in  size  through  absorption  of  other  insti- 
tutions, extension  of  branches  and  increases  in  the  magni- 
tude of  their  branches.  For  example  during  the  thirty 
years  ending  with  1906,  two  hundred  forty-four  banks  were 
absorbed  through  amalgamation,  the  number  of  banking 
offices  in  England  increasing  during  the  same  period  from 
about  three  thousand  *  to  seven  thousand  five  hundred  and 
seven. 

7.  The  present  functions  of  the  various  groups  of  bank- 
ing institutions  doing  business  in  England. — At  the  present 
time  the  functions  of  these  various  institutions  are  to  a 
degree  specialized  and  their  inter-relations  are  such  as  to 
constitute  them  one  great  financial  mechanism.  At  the  cen- 
ter of  the  system  is  the  Bank  of  England. 

The  governing  body  of  this  institution  consists  of  a 
Board  of  Directors  of  twenty-four  members,  a  Governor 
and  a  Deputy-Governor.  The  board  is  chosen  nominally 
by  the  stock-holders,  but  in  reality  is  self-electing,  the  prac- 
tice being  that  the  youngest  members  retire  after  a  year's 
service  and  are  unifomily  reelected  at  the  end  of  the  year. 
Young  men  of  great  promise  in  the  old  established  business 
firms  of  London  are  chosen  to  fill  vacancies.  The  Gover- 
nor holds  office  for  two  years  and  is  regularly  succeeded 
by  the  Deputy-Governor  whose  place  is  taken  by  the  oldest 
Director  who  has  not  held  office.  Directors  who  have  held 
the  offices  of  Deputy-Governor  and  Governor  are  perma- 
nent members  of  the  board  and  constitute  what  is  known  as 
the  Committee  of  the  Treasury  which,  though  its  powers 
are  indefinite,  form  an  executive  cabinet  of  great  influence.** 

Since  the  passage  of  Peel's  act,  the  division  into  an  issue 
and  a  banking  department  has  been  maintained.  The  pri- 
mary function  of  the  issue  department  is  the  exchange  of 

*See  Bankers  Mag.  v.  85,  pp.  168  and  278.  **Bagehot,  ch.  viii. 


Banking  in  England  231 

notes  for  gold  and  gold  for  notes,  the  quantity  of  notes 
outstanding  for  many  years  having  been  greatly  in  excess 
of  £18,450,000,  the  present  limit  of  issues  against  secu- 
rities.* The  business  of  the  banking  department  resembles 
that  of  other  banks  of  deposit,  but  is  peculiar  on  account 
of  the  relations  of  the  Bank  with  the  government,  and  with 
other  banking  and  financial  institutions. 

The  English  government  is  her  largest  single  customer, 
public  deposits  for  the  last  decade  having  averaged  about 
19  per  cent,  of  the  total,  and  her  holdings  of  government 
securities  during  the  same  period  averaging  about  35  per 
cent,  of  the  total  of  all  her  interest-bearing  assets.  The 
government's  account  with  the  bank  is  not  only  large,  but  it 
it  peculiar  in  its  fluctuations,  and  on  this  account  presents  to 
the  management  problems  unlike  those  confronting  other 
banks.  For  example  the  government  deposits  increase 
rapidly  and  its  balance  becomes  large  during  the  tax  collect- 
ing season,  and  regularly  decreases  during  the  remainder  of 
the  year.  At  periods  when  interest  on  the  public  debt  is  due 
large  drafts  must  be  met.  Government  deficits  are  apt  to 
occur  at  tolerably  regular  intervals,  which  must  be  met  by 
loans  from  the  bank,  or  on  the  open  market.  Extraordinary 
events  like  the  financing  of  a  war  bring  peculiar  duties  and 
obligations,  such  as  the  flotation  of  large  government  loans 
and  the  supply  of  large  quantities  of  specie  for  public  use. 

Next  to  the  government  the  most  important  of  the  Bank 
of  England's  customers  are  other  bankers.  The  leading 
joint-stock  and  private  banks  and  discount  firms  of  London 
have  accounts  with  her  and  the  credit  balances  on  these  ac- 
counts constitute  a  very  important  element  in  their  reserves. 
They   regularly  keep  on  hand  in  their  vaults  only  such 

*The  Bank  statement  for  May  i8,  1910,  showed  total  issues  of 
^55. 167,905  against  which  were  held  government  debts  and  other  secur- 
ities to  the  amount  of  £18,450,000  and  gold  coin  and  bullion  to  the 
amount  of  £36,717,905. 


232  Money  and  Banking 

amounts  of  coin  as  are  required  to  meet  daily  needs,  de- 
positing any  surplus  with  the  Bank  and  checking  against 
their  balances  to  meet  deficiencies.  The  provincial  as  well 
as  the  Scotch  and  Irish  banks  proceed  in  the  same  way,  us- 
ing as  their  reserve  agents,  if  not  the  Bank  of  England  her- 
self, some  London  joint-stock  or  private  bank,  which  acts 
as  intermediary  in  the  transfer  of  cash  between  them  and 
the  Bank.  The  Bank  of  England  thus  holds  the  reserves 
of  the  entire  country,  and  the  administration  of  this  fund 
is  one  of  her  chief  public  functions. 

The  Bank  of  England  also  does  business  with  people 
other  than  bankers,  but  ordinarily  such  persons  deal  with 
joint-stock  or  private  banks,  because  these  offer  better  terms 
and  better  accommodations.  The  Bank  of  England  does  not 
pay  interest  on  deposits  and  will  only  discount  the  highest 
class  of  bills,  namely,  those  secured  by  the  names  of  at  least 
two  responsible  British  subjects,  and  maturing  in  compar- 
atively short  periods  of  time.*  Joint  stock  and  private 
banks  pay  interest  on  time  deposits  and  discount  various 
grades  of  paper  which  the  Bank  of  England  rejects.  Their 
rates  of  discount  are  also  regularly  below  that  of  the  Bank 
of  England. 

The  relative  magnitudes  of  the  business  done  with  Banks 
and  with  private  persons  is  not  revealed  to  the  public.  The 
Bank  publishes  a  balance  sheet  on  Friday  of  each  week 
which  states  the  amount  of  the  public  deposits,  but  groups 
all  the  others  under  the  head  "Other  Deposits."  This 
practice  has  continued  since  1877,  previous  to  which  time 
the  bankers'  balances  were  separately  reported. 

*  In  answer  to  a  question  of  the  United  States  Monetary  Commis- 
sion in  1908  one  of  the  Directors  of  the  Bank  stated  that  the  maximum 
period  of  maturity  of  the  bills  discounted  by  the  Bank  was  four 
months  and  exceptionally  six  months,  and  that  the  average  period  was 
forty  to  fifty  days.  "Interviews  on  the  Banking  and  Currency  Sys- 
tems, etc.",  p.  20. 


Banking  in  England  233 

Another  peculiar  feature  of  the  Bank  of  England  is  her 
relatively  large  capital  and  surplus  fund  and  cash  re- 
serve. The  proprietors'  capital,  as  it  is  called,  amounts  to 
£14,553,000,  and  her  surplus  for  many  years  has  not  fallen 
below  £3,000,000.  The  two  combined  are  normally  in  ex- 
cess of  £18,000,000  and  constitute  on  the  average  not  far 
from  25  per  cent,  of  the  total  liabilities  of  the  bank.  The 
greater  part  of  this  fund  is  invested  in  government  securi- 
ties. For  the  greater  part  of  a  century  it  has  been  the  rule 
of  the  Bank  not  to  allow  her  cash  reserves  to  fall  below  33^ 
per  cent,  of  her  deposits.  Her  practice,  however,  has  been 
considerably  better  than  this.  The  average  percentage  of 
her  reserves  to  her  deposits  for  ten  year  periods  since  1845 
is  as  follows  :* 

1845-1854 52%     1885-1894 45% 

1855-1864 42%     1895-1904 49% 

1865-1874 43%     1905-1909 47% 

1875-1884 44% 

During  this  entire  period  the  yearly  average  has  never 
fallen  below  30  per  cent,  and  in  two  years  only,  1857  and 
1866,  as  low  as  this.  In  no  other  year  has  the  average 
ever  fallen  below  ^^  per  cent,  and  since  1882  it  has  never 
fallen  below  40  per  cent.  Since  the  passage  of  Peel's  act  on 
three  occasions  only  has  the  reserve  fallen  to  so  low  a  point 
as  to  threaten  the  suspension  of  specie  payments  by  the  Bank. 
These  were  Oct.  25,  1847,  Nov.  12,  1857,  ^"^  ^^Y  ^^'  i^*^^- 
On  these  occasions  the  Cabinet  assumed  the  responsibility 
of  permitting  the  Bank  to  issue  notes  against  securities  in 
excess  of  the  amount  authorized  by  existing  law,  subse- 
quently obtaining  from  Parliament  the  passage  of  acts  of 
authorization. 

*  Figures  from  1845  to  1890  are  quoted  from  Palgrave,  Bank  Rate  in 
England,  France  and  Germany,  p.  86,  those  for  the  later  periods  were 
computed  from  the  weekly  bank  statements. 


234  Money  and  Banking 

The  joint-stock  banks  serve  the  English  merchant,  manu- 
facturer and  ordinary  citizen,  and  attract  the  major  por- 
tion of  the  custom  of  these  classes.  They  conduct  check- 
ing accounts  and  make  advances  to  their  customers,  receive 
time  deposits  and  pay  interest  on  them,  buy  and  sell  foreign 
and  domestic  exchange,  make  collections  of  dividends  and 
interest  due  in  England  or  abroad,  act  as  agents  in  the  pur- 
chase and  sale  of  domestic  and  foreign  securities,  provide 
places  of  safe  keeping  for  these  and  other  valuables,  and  in 
general  cater  to  the  financial  needs  of  the  ordinary  citizen. 
They  also  act  as  agents  for  country  and  foreign  banks  and 
for  municipalities,  and  other  public  corporations  in  England 
or  her  colonies. 

The  chief  item  in  their  assets  is  usually  loans  and  ad- 
vances to  their  customers  and  discounted  bills,  the  latter 
as  a  rule  being  drawn  by  foreigners  and  endorsed  by  a 
foreign  bank.  London  is  the  largest  market  in  the  world 
for  this  class  of  bills  and,  on  account  of  the  fact  that  they 
mature  in  short  periods  of  time  and  are  usually  paid  at 
maturity,  they  constitute  an  excellent  form  of  investment 
for  banks.  Another  important  item  is  usually  described  as 
money  at  call  and  short  notice.  This,  for  the  most  part, 
represents  loans  at  call  made  to  London  discount  houses 
on  the  security  of  trade  bills  and  advances  to  operators  on 
the  stock  market  for  the  period  between  settlements  which 
on  the  London  exchange  are  made  twice  each  month.  The 
cash  on  hand  and  the  balance  at  the  Bank  of  England  are 
usually  stated  in  a  single  aggregate,  the  latter  being  re- 
garded and  treated  as  the  equivalent  of  cash.  Government, 
colonial  and  municipal  bonds  and  high-class  securities  of 
British  Corporations  are  also  held  by  joint-stock  banks 
in  amounts  commonly,  at  least,  equal  to  their  capital  and 
surplus  funds  and  not  infrequently  in  excess  of  these. 

The  proportion   of  capital  and   surplus   funds  to  total 


Banking  in  England  235 

liabilities  naturally  varies  considerably  among  the  different 
banks  and  from  time  to  time  in  the  same  bank.  During 
recent  years  on  the  average  it  has  not  been  far  from  ten 
per  cent,  in  the  case  of  representative  institutions.  The 
percentage  of  cash  on  hand  and  in  the  Bank  of  England  to 
deposits  has  also  varied  considerably. 

In  estimating  the  resources  of  joint-stock  banks  avail- 
able to  meet  current  demands,  their  loans  at  call,  their  bills 
and  their  stock  exchange  securities  must  be  considered.  In 
case  of  demands  in  excess  of  cash  holdings  and  the  bal- 
ance at  the  Bank  of  England,  a  bank  may  call  its  loans  to 
brokers  and  discount  houses,  rediscount  bills  with  them, 
or  sell  securities  on  the  stock  exchange.  Ordinarily  it  will 
resort  to  these  measures  in  the  order  named.  The  propor- 
tion of  cash  on  hand,  at  the  Bank  of  England,  and  at  call, 
to  deposits  including  notes  in  the  hands  of  the  public,  for 
all  the  banks  of  the  United  Kingdom  during  the  decade 
1896-1905,  probably  fairly  represents  the  normal  condition 
of  the  joint-stock  banks.  It  was  reported  by  the  Bankers 
Magazine  to  be  as  follows : 

1896 23%    1901 27    %    1906 274% 

1897 24%    1902 28    %    1907 27.5% 


23% 

I90I 

24% 

1902 

24% 

1903 

24% 

1904 

27 

% 

28 

% 

26 

% 

27 

% 

1898 24%    1903 26    %    1908 27.7% 

1899 24%    1904 27    %    1909 29    % 

1900 23%    1905 27.4% 

The  functions  of  English  private  banks  cannot  be  easily 
differentiated  from  those  of  the  joint-stock  institutions. 
Their  business  is  essentially  the  same,  but  they  often  cater 
to  special  customers  such  as  the  nobility  and  the  officiSL 
classes.  Some  of  the  oldest  and  most  famous  private  bank- 
ers of  London  have  served  certain  great  families  for  gene- 
rations and  owe  their  prestige  and  their  peculiarities  chiefly 
to  this  fact.    Many  of  them  also  do  a  large  business  with 


236  Money  and  Banking 

country  banks.  On  account  of  the  peculiarities  of  their 
constituencies  their  assets  are  less  uniform  than  those  of 
joint-stock  banks  and  some  of  their  problems  are  peculiar. 
Like  the  joint-stock  institutions,  however,  they  depend  up- 
on their  balances  with  the  Bank  of  England,  loans  at  call, 
rediscounts  of  bills  and  sales  of  securities  for  the  satisfac- 
tion of  their  needs  for  cash. 

The  bill  brokers  and  discount  houses  deal  chiefly  with 
merchants  who  have  bills  to  negotiate,  and  with  foreign 
bankers.  The  extensive  imports  of  British  and  especially 
of  London  merchants,  some  of  them  destined  for  consump- 
tion in  the  British  Isles  and  others  for  shipment  to  other 
parts  of  the  world,  create  an  enormous  volume  of  London 
trade  bills,  a  common  method  of  settlement  for  such  im- 
ports being  the  sale  of  drafts  drawn  by  foreigners  who 
sell  goods  upon  the  English  merchants  who  buy  them. 
These  drafts  reach  the  London  market  through  foreign 
banks  with  London  offices  or  agents,  and  are  bought  for 
investment  or  resale  by  the  bill  brokers  and  discount  houses. 
Domestic  bills  reach  them  directly  through  the  merchants 
who  draw  them  or  through  other  banks,  and  are  also  ex- 
tensively dealt  in.  The  merchants  and  bankers  who  thus 
deal  regularly  with  discount  houses  carry  accounts  with 
them  which  are  essentially  the  same  in  nature  as  the  cur- 
rent accounts  of  other  bankers. 

The  capital  of  the  discount  houses  is  small  relative  to 
the  volume  of  their  business.  They  borrow  heavily  from 
joint-stock  and  private  banks  on  the  security  of  their  bills, 
relying  upon  rediscounts  with  the  Bank  of  England  to  meet 
unusual  demands. 

For  many  years  banks  organized,  owned  and  chiefly 
operated  in  foreign  countries  and  the  English  colonies  have 
operated  in  England,  chiefly  in  London,  by  branch  offices 
or  agencies.     Most  nations  and  all  the  colonies  are  thus 


Banking  in  England  237 

represented  and  in  recent  years  the  number  and  resources  of 
this  class  of  institutions  has  increased  rapidly.  Jan.  i,  1908, 
the  number  of  foreign  and  colonial  banks  with  offices  in 
England  was  one  hundred  and  six,  while  in  1885  it  was 
only  twenty-two.* 

The  chief  business  of  these  institutions  is  the  negotiation 
in  London  of  the  paper  sent  there  by  their  principals,  the 
execution  for  their  clients  of  orders  of  purchase  and  sale 
of  government  and  other  securities,  the  collection  and  sale 
of  foreign  drafts,  and,  in  the  case  of  the  colonial  banks  es- 
pecially, the  making  of  advances  on  merchandise  sent  to 
their  respective  countries.  In  the  case  of  the  Indian  banks 
the  negotiation  of  Council  bills,  that  is  bills  drawn  on  the 
government  of  India  by  the  India  office  in  London,  is  also 
important. 

REFERENCES 

On  the  history  of  banking  in  England  see  Macleod,  A  History  of 
Banking  in  Great  Britain  in  v.  ii  of  a  History  of  Banking  in  all  the 
leading  Nations,  and  The  Theory  and  Practice  of  Banking;  Gilbart, 
The  History  and  Principles  of  Banking;  Bagehot,  Lombard  Street; 
Lawson,  History  of  Banking;  Phillips,  A  History  of  Banks,  Bankers 
and  Banking;  Francis,  History  of  the  Bank  of  England;  Andreades,  A 
History  of  the  Bank  of  England;  Warren,  The  Story  of  the  Bank  of 
England;  Conant,  Modern  Banks  of  Issue,  chs.  iv  and  v;  Dunbar,  ch.  x; 
and  White,  2d  ed.,  ch.  xv. 

For  the  workings  of  the  English  system  see  Interviews  on  Banking 
and  Currency  Systems  of  England,  Scotland,  France,  Germany,  Swit- 
zerland and  Italy  and  Withers,  Palgrave  and  others,  The  English 
Banking  System  published  by  the  National  Monetary  Commission; 
Jaffe,  Das  Englishe  Bankwesen;  and  references  at  the  close  of  ch.  xv. 

♦Bankers  Magazine  for  May,  1885  and  Jan.  1908. 


CHAPTER  XIII 
BANKING  IN  FRANCE 

The  history  of  joint-stock  banking  in  France  began  with 
the  brilliant,  but  disastrous  experiments  of  John  Law  in 
the  early  years  of  the  eighteenth  century,  but  the  first  in- 
stitution of  the  modern  type  to  be  established  was  La  Caisse 
d'Escompte  which  was  chartered  in  1767.  After  a  short 
life  of  two  years  this  institution  was  succeeded  by  another 
of  the  same  name  which  lasted  until  1793.  At  that  time 
the  French  government  was  in  the  midst  of  a  series  of  ex- 
periments with  inconvertible  government  notes  which 
proved  disastrous  and,  for  the  time  being,  prevented  the 
establishment  of  other  banking  institutions.  In  1796  a 
third  La  Caisse  d'Escompte  was  chartered  and  in  the  fol- 
lowing year  an  institution  known  as  La  Caisse  d'Escomptes 
du  Commerce.  In  1797  still  another  joint-stock  bank  was 
chartered  under  the  name  Le  Comptoir  Commercial.  All 
these  banks  were  located  in  the  city  of  Paris.  In  1789 
there  was  established  in  the  city  of  Rouen  Le  Societe  Gene- 
rale  du  Commerce  de  Rouen. 

I.  Origin  and  early  history  of  the  Bank  of  France. — 
These  institutions  did  not  fully  meet  the  needs  of  com- 
merce and  the  government,  and  accordingly  when  he  be- 
came First  Consul,  Napoleon  devised  a  plan  for  a  larger  and 
more  serviceable  institution  and  embodied  it  in  a  decree 
issued  Jan.  18,  1800,  establishing  the  Bank  of  France.  The 
business  the  institution  was  to  perform  was  described  in 
the  following  terms : 

238 


Banking  in  France  239 

"i.  To  discount  bills  of  exchange  and  drafts  to  order, 
bearing  the  signatures  of  at  least  three  French  citizens 
or  foreign  merchants  of  acknowledged  reputation  and  sol- 
vency. 

2.  To  undertake  collections  for  the  account  of  private 
citizens  and  public  establishments  and  to  make  advances  in 
cases  of  such  collections  as  may  appear  to  be  secure. 

3.  To  receive,  on  account,  cash  deposits  and  collections 
in  behalf  of  private  citizens  and  public  establishments,  and 
to  honor  checks  and  drafts  drawn  upon  the  bank  against 
the  amounts  standing  to  the  credit  of  account-holders. 

4.  To  issue  notes  payable  to  bearer  at  sight,  and  notes 
to  order  payable  within  a  certain  number  of  days  after 
sight.  These  notes,  as  issued  by  the  bank,  shall  be  so  pro- 
portioned to  the  reserve  cash  in  the  vaults  of  the  bank,  and 
with  such  regard  for  the  maturing  of  negotiable  paper  held 
by  the  bank,  that  the  bank  can  at  no  time  be  exposed  to  dan- 
ger of  delaying  payment  of  its  obligations  when  presented. 

5.  To  open  a  Department  for  Investments  and  Savings, 
wherein  all  sums  offered  in  excess  of  fifty  francs  should  be 
received  for  repayment  at  stated  periods." 

The  administration  of  the  Bank  was  entrusted  to  a  Board 
of  Regents  of  fifteen  members  and  a  Board  of  Censors  of 
three  members,  both  to  be  appointed  by  the  two  hundred 
chief  stockholders,  and  a  Central  Committee  of  three  mem- 
bers to  be  chosen  by  the  Censors  and  the  Regents,  which  to- 
gether constituted  what  was  called  the  General  Council  of 
the  Bank.  The  Regents  were  to  hold  office  for  five  years, 
one-fifth  retiring  each  year  subject,  however,  to  reelection, 
and  the  Censors  for  three  years,  one  retiring  each  year,  but 
eligible  for  reelection.  The  capital  was  fixed  at  30,000,000 
francs  divided  into  30,000  shares  of  1000  francs  each. 

During  the  Napoleonic  regime  these  original  statutes 
were  several  times  modified  notably  in  1803,  1806  and  1808. 
The  chief  provisions  of  the  act  of  1803,  dated  April  14, 
gave  the  new  bank  the  monopoly  of  note  issues  in  Paris; 


240  Money  and  Banking 

prohibited  the  estabHshment  of  banks  of  issue  in  the  depart- 
ments without  the  authorization  of  the  state ;  increased  the 
capital  to  45,000,000  francs;  and  provided  that  seven  of 
the  fifteen  regents  and  the  three  censors  be  chosen  from 
those  stockholders  who  were  manufacturers  or  merchants, 
and  that  a  council  of  twelve  stockholders  engaged  in  com- 
merce in  Paris  be  selected  by  the  Censors  to  give  counsel 
and  advice  regarding  discounts. 

The  act  of  1806  was  the  result  of  a  crisis  through  which 
the  bank  passed  in  1805.  Through  bad  management  it 
became  the  possessor  of  a  large  amount  of  the  paper  of  a 
firm  engaged  in  furnishing  supplies  to  the  government  and 
the  failure  of  this  firm  obliged  it  to  apply  to  the  state  for 
the  privilege  of  temporarily  suspending  the  redemption  of 
its  notes  in  specie.  This  request  was  denied  but  it  was 
permitted  to  limit  for  a  time  the  amount  to  be  redeemed 
each  day.  This  experience  convinced  Napoleon  of  the  de- 
sirability of  closer  supervision  of  the  institution  by  the 
state.  The  act  of  April  22,  1806,  accordingly  abolished  the 
Central  Committee  in  whose  hands  the  direct  management 
of  the  bank's  affairs  had  been  placed  and  substituted  for  it 
a  Governor  and  two  Sub-governors  to  be  appointed  by  the 
Emperor.  It  further  provided  that  three  of  the  Regents 
must  be  selected  from  the  Receivers  General.  The  Gover- 
nor was  made  the  presiding  officer  of  the  stockholders  as- 
sembly, of  the  General  Council,  and  of  all  committees;  was 
given  the  exclusive  right  to  appoint  and  dismiss  the  clerks 
and  subordinate  officers  of  the  bank;  and  his  approval  of 
all  the  paper  admitted  to  discount  was  required.  Among 
other  important  provisions  was  the  requirement  that  the 
so-called  statutes  of  the  bank,  i.e.,  the  detailed  provisions 
for  its  administration  to  be  drawn  by  the  General  Council, 
must  be  submitted  to  the  Emperor  for  approval  and  that 
the  capital  be  doubled  by  the  issue  of  45,000  new  shares. 


Banking  in  France  241 

The  statutes  of  the  bank  under  the  new  organization, 
approved  by  the  Emperor  in  a  decree  dated  Jan.  16,  1808. 
contain  among  other  regulations,  one  permitting  the  substi- 
tution for  the  third  signature,  previously  required  on  all 
bills  admitted  to  discount,  of  collateral  in  the  form  of  bank 
stock  or  of  five  per  cent,  consolidated  state  funds,  provided 
the  bill  originated  in  a  sale  of  merchandise,  and  another 
permitting  the  bank  with  the  authorization  of  the  Govern- 
ment to  establish  branches  in  the  provinces.  In  accordance 
with  this  latter  provision  branches  were  authorized  in 
Rouen,  Lyons  and  Lille  by  decrees  dated  June  24,  1808  and 
May  29,  18 10. 

During  the  period  which  intervened  between  1808  and 
the  downfall  of  Napoleon  in  1815  the  fortunes  of  the  bank 
were  closely  connected  with  those  of  the  Government. 
Serious  crises  occurred  in  the  years  1810  and  1814,  the 
former  one  caused  by  the  interference  with  commerce  oc- 
casioned by  the  blockades,  and  the  second  by  the  first  de- 
feat of  Napoleon.  During  both  of  these  periods  the  bank 
held  large  quantities  of  government  paper  and  its  reserves 
ran  low.  In  18 14  it  was  obliged  to  resort  to  the  expedient 
adopted  in  1806,  that  of  refusing  to  redeem  more  than  a 
small  portion  of  its  notes  per  day.  In  18 18  the  bank  also 
passed  through  a  crisis  occasioned  by  the  operations  of  the 
Government  in  connection  with  the  public  debt.  The  Gov- 
ernment of  the  restoration  was  unable  at  first  to  secure  the 
confidence  of  the  investing  public,  and  therefore  turned 
over  to  the  bank  the  management  and  security  of  the  public 
debt,  granting  to  it  as  security  the  returns  of  certain  taxes 
and  a  considerable  number  of  bonds  which  it  was  author- 
ized to  sell  in  case  of  need.  The  bank  thus  undertook  the 
responsibility  of  paying  the  interest  on  the  debt  and  of 
carrying  through  measures  for  its  refunding. 

The  experience  of  the  bank  during  the  last  years  of  the 


242  Money  and  Banking 

Napoleonic  regime  convinced  it  that  close  connection 
with  the  Government  was  on  the  whole  disadvantageous, 
and  that  it  would  gain  from  a  reduction  of  its  capital  and 
the  closing  of  its  branches.  It  accordingly  petitioned  the 
new  Government  for  permission  to  close  its  branches,  to 
reduce  its  capital  to  67,900,000  francs,  and  to  make  such 
modifications  in  its  organization  as  would  put  its  direct 
management  in  the  hands  of  representatives  of  the  stock- 
holders, reserving  to  the  Government  simply  the  right  of 
supervision.  The  first  two  of  the  bank's  requests  were 
granted,  and  accordingly  the  three  branches  were  closed 
and  a  sufficient  quantity  of  the  Bank's  stock  purchased  to 
reduce  the  capital  to  the  desired  figure. 

2.  Banking  in  the  Provinces. — The  closing  up  of  the 
branches  of  the  Bank  was  accompanied  by  the  authoriza- 
tion of  independent  banks  of  issue  in  a  number  of  the  cities 
of  France.  In  the  year  18 17  one  such  bank  was  opened 
in  Rouen,  in  18 18  two  were  opened  at  Nantes  and  Bor- 
deaux respectively.  For  many  years,  however,  provincial 
banking  remained  chiefly  in  the  hands  of  private  bankers 
where  it  had  been  since  the  beginning  of  banking  operations 
in  the  middle  ages.  It  was  these  bankers  who  served  as 
intermediaries  between  the  lesser  merchants  and  the  Bank 
of  France,  supplying  the  third  signature  required  on  bills 
admitted  to  discount  by  that  institution.  Their  unreliabil- 
ity in  times  of  crisis,  however,  was  illustrated  during  the 
revolution  of  1830  when  they  temporarily  withdrew  from 
business  and  left  the  mercantile  classes  without  the  credit 
accommodations  necessary  for  the  conduct  of  commerce.  On 
this  occasion  the  government  of  Louis  Philippe  came  to 
their  aid  by  the  establishment  of  local  discount  offices 
called  Comptoirs  de'Escompte,  and  this  experience  directed 
attention  to  the  need  for  better  banking  accommodations  in 
the  provinces.    In  1835  two  additional  local  banks  of  issue 


Banking  in  France  243 

were  established  at  Lyon  and  Marseilles,  and  in  1836  the 
Bank  of  France  petitioned  the  Government  for  permission 
again  to  open  branches  and  for  the  exclusive  right  to  issue 
notes  in  all  places  in  which  such  branches  should  be  es- 
tablished. The  Government  acceded  to  the  Bank's  request, 
but  continued  also  the  policy  of  organizing  independent 
banks.  In  1836  branches  of  the  Bank  of  France  were  opened 
at  Rheims  and  Sainte  Etienne,  and  in  June  of  that  year  and 
August  of  the  year  following  independent  banks  were  organ- 
ized at  Lille  and  Havre.  In  Oct.,  1837,  and  Jan.,  1838, 
branches  of  the  Bank  of  France  were  opened  at  Saint  Quen- 
tin  and  Montpellier,  and  in  June  and  November,  1838,  in- 
dependent banks  were  opened  at  Toulouse  and  Orleans.  A 
tenth  independent  bank  was  authorized  at  Dijon  Aug.  4,  1839, 
but  it  was  never  put  into  operation.  Branches  of  the  Bank 
of  France  were  organized  in  1840  at  Grenoble  and  An- 
gouleme,  in  1841  at  Besangon,  in  1842  at  Caen,  Chateau- 
reux  and  at  Clermont-Ferrand,  in  1844  at  Miilhouse,  and 
in  1846  at  Strasburg  and  Le  Mans. 

3.  Effects  of  the  revolution  of  1848. — At  the  time  of  the 
outbreak  of  the  Revolution  in  1848,  there  were  in  operation 
in  the  departments  eleven  branches  of  the  Bank  of  France, 
and  nine  independent  banks  of  issue.  As  a  result  of  the 
Revolution  the  Bank  was  obliged  to  suspend  specie  pay- 
ments, and  by  an  ordinance  of  the  Provincial  Government 
its  notes  were  made  legal  tender  throughout  the  country, 
on  condition  that  they  should  not  exceed  in  magnitude  350,- 
000,000  francs.  The  nine  departmental  banks  were  also 
permitted  to  suspend  payments,  and  their  notes  were  made 
legal  tender  in  the  departments  in  which  they  were  located. 
During  the  period  of  enforced  circulation  of  bank-notes 
which  followed,  the  advantages  of  the  monopolization  of 
the  issue  function  by  a  powerful  central  institution  were  re- 
vealed in  an  impressive  manner.     The  issues  of  the  local 


244  Money  and  Banking 

banks  depreciated  in  varying  degrees  and  the  circulation 
of  each  was  Hmited  to  the  department  in  which  it  was  lo- 
cated, thus  exposing  commerce  between  departments  to 
heavy  losses  and  subjecting  it  to  great  inconvenience.  The 
notes  of  the  Bank  of  France  on  the  other  hand  depreciated 
to  a  slight  extent  only  and  circulated  at  a  uniform  value 
throughout  the  country.  This  circumstance  was  sufficient 
to  turn  the  tide  of  public  sentiment,  so  far,  at  least,  as 
it  was  represented  in  the  government,  in  favor  of  a  single 
bank  of  issue,  and  accordingly  a  law  was  passed  author- 
izing the  absorption  of  the  nine  departmental  banks  by  the 
Bank  of  France,  and  granting  to  the  latter  institution  a 
monopoly  of  note-issues.  These  nine  provincial  banks  be- 
came branches  of  the  Bank  of  France,  the  capital  of  which 
was  in  consequence  increased  from  67,900,000  francs  to 
91,250,000  francs. 

Another  important  effect  of  the  Revolution  of  1848 
was  the  establishment  of  a  number  of  Comptoirs  d'Es- 
compte.  These  were  organized  on  a  plan  somewhat  differ- 
ent from  that  followed  after  the  Revolution  of  1830.  The 
capital  needed  was  furnished  one-third  by  the  state,  one- 
third  by  the  municipality  in  which  it  was  located,  and  one- 
third  by  private  individuals.  As  in  1830  they  served  as 
intermediaries  between  the  commercial  classes  and  the  Bank 
of  France  by  supplying  the  third  signature  needed  to  render 
the  bills  of  exchange  originating  in  the  ordinary  processes 
of  commerce  available  for  discount.  Altogether  sixty- 
seven  of  these  temporary  discount  offices  were  opened  in 
various  parts  of  France.  Twenty-three  went  out  of  exis- 
tence with  the  expiration  of  their  charters,  but  forty-four 
continued  to  operate  under  the  combined  auspices  of  the 
state,  the  municipalities  and  the  private  individuals  who 
furnished  their  capital,  until  1853,  after  which  several  of 
them  were  reorganized  on  a  purely  private  basis.    Notable 


Banking  in  France  245 

among  these  was  the  Comptoir  d'Escompte  de  Paris  which 
is  one  of  the  four  leading  credit  institutions  of  contem- 
porary France.  These  Comptoirs  d'Escompte  thus  mark 
the  beginnings  of  a  new  type  of  banking  institution,  name- 
ly, one  without  the  right  of  issue,  catering  to  the  interests 
of  the  mercantile  and  industrial  classes  and  intermediating 
between  them  and  the  Bank  of  France. 

4.  The  Bank  of  France  since  1848.— Besides  the  acts  al- 
ready described,  the  chief  landmarks  in  the  legislative  his- 
tory of  the  Bank  of  France  are  those  of  June  30,  1840, 
June  9,  1857  ^"d  Nov.  17,  1897.  The  law  of  1803  ^^^^ 
the  date  of  the  expiration  of  the  privileges  of  the  Bank  at 
Sept,  24,  1818,  and  that  of  1806  extended  its  lease  of  life 
for  twenty-five  years  beyond  that  date,  i.  e.,  to  Sept.  24, 
1843.  The  acts  of  1840, 1857  and  1897  granted  extensions  re- 
spectively to  Dec.  31,  1867,  Dec.  31,  1897  and  Dec.  31,  1920. 

The  original  capital  of  the  Bank  was  30,000,000  francs, 
but  it  was  increased  to  45,000,000  francs  in  1803  and  to 
90,000,000  in  1806.  On  the  occasion  of  the  closing  of  its 
first  branches  the  Bank  was  allowed  to  purchased  22,100 
of  its  shares,  thus  reducing  its  capital  to  67,900,000  francs. 
After  the  revolution  of  1848,  when  the  local  banks  of  issue 
were  absorbed,  this  was  increased  to  91,250,000  francs,  and 
again  in  1857  to  182,500,000  francs,  at  which  figure  it  still 
remains. 

The  accumulation  of  a  surplus  fund  was  required  by  the 
law  of  1803  which  provided  that  all  earnings  in  excess  of 
six  per  cent,  should  be  invested  in  five  per  cent,  consolidated 
government  stock  for  the  benefit  of  such  a  fund.  This 
regulation  was  modified  in  1806  so  as  to  permit  two-thirds 
of  the  excess  of  the  earnings  above  six  per  cent,  to  be  added 
to  the  dividends.  Laws  of  July  4,  1820  and  Dec.  6,  183 1, 
permitted  a  part  of  the  surplus  then  accumulated  to  be  dis- 
tributed among  the  stockholders  and  another  passed  May  17, 


246  Money  and  Banking 

1834,  fixed  the  amount  of  the  surplus  at  10.000,000  francs 
in  Rentes  plus  a  sum  sufficient  to  cover  the  value  of  the 
Bank's  premises.  The  law  of  June  9,  1857,  added  to  this 
fund  any  premium  that  might  be  realized  from  the  disposal 
of  the  91,250  new  shares  which  were  authorized  to  be  sold 
and  any  profits  realized  from  a  rate  of  discount  in  excess  of 
six  per  cent. 

Subject  to  the  statues  regarding  discounts  and  advances 
and  redemption  in  specie  on  demand,  from  the  beginning 
the  officers  of  the  Bank  have  been  allowed  a  great  amount 
of  freedom  in  the  regulation  of  note-issues.  Previous  to 
the  Franco-Prussian  war  no  limitation  was  placed  upon 
the  maximum  amount  of  the  issues  except  during  the  period 
of  suspension  following  the  Revolution  of  1848.  After  the 
outbreak  of  the  war  with  Prussia  the  Bank  was  again  per- 
mitted to  suspend  specie  payments  on  condition  that  the 
total  amount  of  notes  outstanding  should  not  exceed  1,800,- 
000,000  francs.  This  limit  was  raised  to  2,400,000,000 
francs  August  14,  1870,  to  2,800,000,000  francs  Dec.  12, 
1870  and  to  3,200,000,000  francs  July  15,  1872.  The  Bank 
resumed  specie  payments  in  1878  but  the  principle  of  plac- 
ing a  maximum  limit  on  its  note-issues  was  retained,  this 
limit  being  raised,  however  to  3,500,000,000  francs  Jan. 
30,  1884,  to  4,000,000,000  francs  Jan.  25,  1892,  to  5,000,- 
000,000  francs  Nov.  17,  1897,  and  to  5,800,000,000  francs 
Feb.  9,  1906. 

By  its  first  statutes  the  discounts  of  the  Bank  were  lim- 
ited to  paper  bearing  the  signatures  of  at  least  three  solvent 
persons  and  maturing  in  not  to  exceed  ninety  days.  In 
1808  a  modification  was  made  by  the  permission  to  accept 
in  place  of  the  third  signature,  in  cases  in  which  the  paper 
represented  genuine  mercantile  transactions,  collateral  in 
the  form  of  bank  stock,  or  of  five  per  cent,  consolidated 
state  funds.    The  only  changes  made  in  these  early  statutes 


Banking  in  France  247 

in  later  times  have  consisted  in  the  enlargement  of  the  list 
of  securities  that  may  be  accepted  as  collateral  in  place  of 
the  third  signature.  The  law  of  May  21,  1840  allowed  the 
acceptance  of  all  classes  of  securities  issued  by  the  French 
government;  that  of  Mar.  26,  1898  added  warehouse  re- 
ceipts to  the  list;  that  of  Jan.  13,  1869,  added  securities  of 
the  French  railroads,  and  bonds  of  the  city  of  Paris,  the 
Credit  Foncier  and  the  Societe  Algerienne;  and  that  of 
Feb.  28,  1880,  added  the  bonds  of  all  French  cities  and 
departments. 

In  addition  to  discounting  bills  of  exchange  and  other 
commercial  paper  the  Bank  is  permitted  to  make  loans  on 
collateral.  The  decree  of  Jan.  16,  1808,  restricted  the  col- 
lateral that  might  be  accepted  to  French  government  se- 
curities maturing  at  fixed  dates,  gold  and  silver  bullion  and 
foreign  monies.  The  law  of  May  17,  1834,  enlarged  this 
list  so  as  to  include  all  classes  of  securities  of  the  French 
government.  Obligations  of  the  French  railroads  were 
added  to  the  list  by  the  law  of  Mar.  3,  1852,  those  of  the 
city  of  Paris  by  the  law  of  Mar.  28,  1852,  those  of  the 
Credit  Foncier  by  the  law  of  June  9,  1857,  those  of  the 
Societe  Algerienne  by  the  law  of  Jan.  13,  1869,  and  those 
of  all  the  French  cities  and  departments  by  the  law  of 
Feb.  28,  1880. 

From  the  beginning  the  Bank  has  served  as  banker  for 
the  French  government.  In  this  capacity  it  has  received 
the  public  funds  on  deposit  at  its  various  offices  in  Paris 
and  the  departments,  transferred  and  paid  them  out  at  the 
times  and  places  at  which  they  were  needed,  discounted  the 
government's  paper,  and  made  temporary  loans  to  it,  and 
managed  the  public  debt  and  the  metallic  circulation  of  the 
country.  The  terms  and  conditions  on  which  these  ser- 
vices are  performed  are  carefully  regulated  by  law  and 
have  been  many  times  changed  usually  in  the  interest  of 


248  Money  and  Banking 

the  government.  Space  will  not  permit  a  detailed  discus- 
sion of  them  here.  Generally  speaking  it  may  be  said  that 
the  chief  privilege  enjoyed  by  the  state  over  private  indi- 
viduals consists  at  the  present  time  of  a  permanent  loan 
without  interest  of  180,000,000  francs.  It  has  enjoyed  this 
privilege  only  since  1897.  Previous  to  that  date  special  ad- 
vances were  from  time  to  time  authorized  at  special  rates, 
one  for  example  in  1857  of  60,000,000  francs  at  three  per 
cent,  and  an  additional  one  in  1878  of  80,000,000  at  one  per 
cent.  When  the  period  for  the  enjoyment  of  its  special 
privileges  was  prolonged  in  1897  to  1920  it  was  provided  as 
one  of  the  conditions  that  these  advances  should  be  increased 
to  180,000,000  francs  and  that  the  payment  of  interest 
should  cease. 

In  the  establishment  of  branches  the  Bank  has  moved 
slowly  and  usually  under  pressure  of  the  government.  In 
the  year  1848  there  were  twenty-four  in  operation,  and  be- 
tween that  date  and  1857  seventeen  more  were  established. 
The  bank  act  passed  in  that  year  authorized  the  govern- 
ment, after  a  period  of  ten  years,  to  require  the  Bank  to 
establish  branches  in  all  the  departments  in  which  none  exis- 
ted, and  this  act  was  supplemented  in  1873  by  another 
passed  Jan.  27th  requiring  the  government  to  arrange  with 
the  Bank  for  the  opening  of  eleven  new  branches  by  Jan. 
I,  1875  ^"d  of  seven  others  in  each  of  the  years  1875  and 
1876.  In  1897  there  were  in  all  ninety-four  branches  in 
operation,  and  the  bank  act  passed  in  that  year  required  an 
increase  in  the  number  to  one  hundred  twelve  during  the 
two  succeeding  years.  For  the  increase  of  its  facilities  for 
transacting  business  in  the  departments  the  Bank  has  estab- 
lished agencies  and  so-called  auxiliary  offices  in  a  number 
of  towns  in  which  branches  are  not  located.  The  number 
of  these  is  greatly  in  excess  of  that  of  the  branches  and 
has  increased  fairly  rapidly  in  recent  years.     The  report 


Banking  in  France  249 

of  the  Bank  to  its  stockholders  for  1909  indicates  that  at 
the  close  of  that  year  there  were  in  operation  one  hundred 
twenty-eight  branches,  sixty-nine  auxiliary  offices  and  three 
hundred  and  five  agencies,  making  together  with  the  Cen- 
tral Bank  five  hundred  and  three  places  at  which  the  Bank 
did  business. 

The  administrative  machinery  of  the  branches  is  pat- 
terned after  that  of  the  central  office  at  Paris  to  which 
every  branch  is  strictly  subordinate.  Indeed  the  branches 
constitute  simply  the  machinery  through  which  the  business 
of  the  Bank  in  the  departments  is  transacted  and  are  not 
in  any  sense  independent  institutions.  The  agencies  in  the 
so-called  villcs  rat t ache es  are  attached  to  the  branches  for 
administrative  purposes  and  are  available  only  for  discount 
and  a  few  other  purposes.  The  auxiliary  offices  are  opened 
only  on  certain  days  each  month  for  the  transaction  of  a 
limited  line  of  business  only. 

5.  Other  banking  institutions  since  1848. — The  Comptoir 
d'Escompte,  mentioned  in  a  preceding  paragraph,  proved 
to  be  the  type  of  institution  destined  to  dominate  the  com- 
mercial life  of  France  on  the  financial  side.  When  it  was 
reorganized  as  a  private  bank  in  1853  it  had  a  capital  of 
20,000,000  francs  which  was  increased  to  40,000,000  francs 
in  i860  and  to  80,000,000  francs  in  1870.  Its  rapid  ex- 
pansion began  about  i860  through  the  opening  of  branch 
offices  in  foreign  countries  and  later  in  the  departments 
and  various  parts  of  Paris,  About  this  time  also  appeared 
competitive  institutions  of  the  same  general  character,  of 
which  three  are  deserving  of  especial  mention  since  with 
the  Comptoir  d'Escompte  they  constitute  the  four  leading 
banks  of  contemporary  France.  The  oldest  of  this  trio  is 
the  Credit  Industrial  et  Commercial  established  in  1859 
with  a  capital  of  60,000,000  francs  and  modeled  after  the 
great  joint-stock  banks  of  England.     In  1863  the  Credit 


250  Money  and  Banking 

Lyonnais  was  established  first  as  a  local  institution  of  the 
city  of  Lyons  with  a  capital  of  20,000,000  francs,  but  des- 
tined to  outstrip  all  the  others  and  to  become  one  of  the 
largest  private  banking  institutions  in  the  world.  The  So- 
ciete  Generale,  the  youngest  of  the  three,  was  established 
in  1864  with  a  capital  of  120,000,000  francs. 

The  growth  of  these  institutions  has  been  rapid.  The 
Comptoir  d'Escompte  became  seriously  involved  in  the  af- 
fairs of  the  copper  trust  and,  when  that  failed  in  1888,  was 
obliged  to  go  into  liquidation.  It  was  reorganized,  how- 
ever, Apr.  1889,  under  the  name  of  Le  Comptoir  Na- 
tional d'Escompte  de  Paris  with  a  capital  of  40,000,000 
francs,  which  was  increased  to  75,000,000  francs  in  1891, 
to  100,000,000  francs  in  1895,  to  150,000,000  francs  in 
1900  and  to  200,000,000  francs  in  1909.  The  Credit  Lyon- 
nais increased  its  paid  up  capital  to  25,000,000  francs  in 
1872,  to  37,500,000  francs  in  1875,  to  50,000,000  francs 
in  1879,  to  200,000,000  francs  in  189 1  and  to  250,000,000 
francs  in  1900.  It  has  also  collected  a  surplus  fund  which 
since  1907  has  amounted  to  125,000,000  francs.  The  So- 
ciete  Generale  increased  its  paid  up  capital  to  120,000,000 
francs  in  1895,  to  160,000.000  francs  in  1899,  to  200,000,- 
000  francs  in  1903,  to  250,000,000  francs  in  1905,  to  300,- 
000,000  francs  in  1906  and  to  400,000,000  francs  in  1909. 
The  capital  of  the  Credit  Industrial  was  raised  to  80,000,- 
000  francs  in  1900  and  to  100,000,000  francs  in  1909.  The 
magnitude  of  the  business  of  these  four  institutions  has 
grown  with  a  rapidity  at  least  equal  to  that  of  their  capital. 
The  discounts,  deposits  and  advances  of  the  four  institu- 
tions combined,  in  the  year  1890,  attained  a  greater  magni- 
tude than  that  of  the  corresponding  items  of  the  Bank  of 
France  and  in  recent  years  the  Credit  Lyonnais  alone  has 
surpassed  the  Bank  of  France  in  the  magnitude  of  all  these 
lines  of  business. 


Banking  in  France  251 

This  growth  has  been  accompanied  by  the  establishment 
of  branch  offices  and  agencies  on  a  large  scale.  In  1905 
the  four  institutions  besides  their  head  offices,  had  one 
hundred  seventy-eight  other  places  of  business  in  Paris  and 
its  suburbs,  five  hundred  seventy-four  in  three  hundred 
sixty-two  provincial  towns,  and  forty-seven  in  the  French 
colonies  and  foreign  countries. 

In  the  establishment  of  branches  these  institutions  have 
not  pursued  identical  policies.  The  Credit  Industrial  et 
Commercial  has  confined  its  operations  to  Paris  and  its 
suburbs,  and  the  Societe  Generale  to  France,  with  the  ex- 
ception of  a  branch  in  London  and  one  in  San  Sebastian, 
Spain,  while  the  Comptoir  d'Escompte  and  the  Credit  Lyon- 
nais  have  extended  their  branches  into  the  French  colonies 
and  foreign  countries.  In  their  expansion  outside  of  Paris 
and  the  larger  French  provincial  towns,  so  far  as  possible, 
they  seem  to  have  avoided  competition.  In  their  foreign 
expansion,  for  example,  the  Credit  Lyonnais  and  the  Comp- 
toir d'Escompte  have  avoided  the  establishment  of  branches 
in  the  same  places,  the  only  exceptions  being  London  and 
Brussels.  The  other  foreign  branches  of  the  latter  are  in 
provincial  England  (Liverpool  and  Manchester),  the  Uni- 
ted States  (New  Orleans),  India,  Australia.  Tunisia,  Mad- 
agascar and  Morocco,  while  those  of  the  former  are  in 
Spain,  Portugal,  Switzerland,  Russia,  Turkey,  Asia  Minor, 
Egypt  and  Algeria.  In  provincial  France  all  except  the 
Credit  Industrial  et  Commercial  are  represented.  In  1905 
all  three  had  offices  in  sixty-three  towns,  two  of  them  in 
eighty-two  other  towns,  the  Comptoir  d'Escompte  and  the 
Credit  Lyonnais  in  nine,  the  Comptoir  d'Escompte  and  the 
Societe  Generale  in  eight,  and  Credit  Lyonnais  and  the 
Societe  Generale  in  sixty-five;  in  twenty-two  towns  the 
Comptoir  d'Escompte  alone  was  represented,  and  in  twenty 


252  Money  and  Banking 

the  Credit  Lyonnais  alone  and  in  one  hundred  seventy-five 
the  Societe  Generale  alone. 

In  the  process  of  expansion  into  every  town  of  any  im- 
portance in  France,  and  into  the  colonies  and  foreign  coun- 
tries with  which  the  French  people  chiefly  trade,  and  even 
into  the  suburbs  and  chief  sections  of  Paris  and  the  larger 
towns,  these  four  institutions  checked  the  growth  of  smaller 
institutions  and  absorbed  a  considerable  number  of  those 
already  in  existence.  There  are  still  surviving  a  number  of 
unincorporated  private  banks,  some  of  them  of  high  stand- 
ing and  considerable  importance,  and  a  fair  number  of 
joint-stock  institutions  of  local  importance  with  head  offices 
in  the  chief  provincial  towns  and  branches  in  the  outlying 
districts.  In  Paris  and  some  of  the  larger  towns  there  are 
also  branches  of  foreign  banking  houses  and  some  French 
banks  organized  primarily  for  the  prosecution  of  foreign 
or  other  special  kinds  of  business.  The  work  of  all  these 
minor  institutions  may  be  regarded  as  supplementary  to 
that  of  the  Bank  of  France  and  of  the  four  great  credit  in- 
stitutions just  described  which  together  constitute  the  es- 
sential and  most  important  parts  of  the  banking  machinery 
of  the  country. 

Among  French  financial  institutions  of  first  grade  de- 
veloped since  1848,  must  be  mentioned  the  Credit  Foncier 
established  in  1852  for  the  purpose  of  extending  credit 
based  on  mortgage  security  to  landowners  and  particularly 
to  farmers.  In  its  organization  it  was  modeled  after  the 
Bank  of  France,  and  in  its  business  methods,  after  insti- 
tutions established  for  similar  purposes  in  Germany.  It 
was  intended  to  serve  as  an  intermediary  between  land- 
owners wishing  to  borrow  on  mortgage  security  and  people 
with  capital  to  invest  by  supplying  the  latter  with  a  form  of 
bond  more  readily  negotiable  than  a  mortgage,  and  secured 
by  its  own  capital  and  credit,  as  well  as  by  real  estate  mort- 


Banking  in  France  253 

gages  received  from  borrowers.  It  was  given  authority 
to  operate  throughout  France  by  means  of  branches  and  to 
absorb  two  or  three  smaller  institutions  previously  au- 
thorized. Its  original  constitution  and  the  scope  of  its 
operations  have  been  several  times  modified,  notably  in 
1869  by  a  decree  of  Aug.  9  authorizing  it  to  receive  de- 
posits and  make  advances  for  short  periods,  not  to  exceed 
90  days,  on  die  same  kind  of  securities  that  the  Bank  of 
France  was  permitted  to  accept  for  the  same  purposes.  This 
decree  brought  it  into  the  category  of  commercial  banks, 
though  its  main  business  has  continued  to  be  that  of  issuing 
bonds  and  with  the  proceeds  making  long  period  loans  on 
real  estate  security. 

At  the  present  time  the  Credit  Foncier  is  one  of  the 
largest  and  most  influential  financial  institutions  of  France. 
Jan.  I,  1910,  its  capital  amounted  to  200,000,000  francs, 
its  surplus  to  over  20,000,000  francs,  its  loans  secured  by 
mortgage  to  over  2,000,000,000  francs,  and  its  loans  to  com- 
munes to  very  nearly  the  same  figure,  and  its  advances  on 
other  securities  to  over  38,000,000  francs.  Its  total  re- 
sources at  that  date  amounted  to  4,764,683,983.43  francs, 
an  aggregate  exceeded  only  by  that  of  the  Bank  of  France. 

6.  The  present  position  of  the  Bank  of  France. — The  his- 
torical sketch  contained  in  the  preceding  sections  has  made 
clear  the  special  functions  of  the  Bank  of  France  relative 
to  the  conduct  of  the  financial  operations  of  the  govern- 
ment and  to  the  currency,  but  further  explanations  are 
needed  to  indicate  its  present  relations  to  the  other  financial 
institutions  of  the  country. 

The  limitations  imposed  by  law  on  the  Bank's  power  to 
discount  and  to  make  advances  prevented  it  from  fully  satis- 
fying the  needs  of  the  rank  and  file  of  the  industrial  and 
commercial  classes.  Most  of  these  have  always  been,  and 
still  are,  unable  to  supply  three  signatures  to  the  paper  they 


254  Money  and  Banking 

want  to  discount  and  to  furnish  the  kinds  of  collateral  re- 
quired as  a  substitute  for  the  third  signature  or  as  a  basis 
for  advances.  A  field  for  other  banking  institutions  has, 
therefore,  always  been  open,  and  has  been  occupied,  very  in- 
completely to  be  sure  until  recent  times,  but  quite  satis- 
factorily since  the  development  of  the  great  credit  institu- 
tions of  the  present  day.  The  Bank's  practice  of  not  pay- 
ing interest  on  deposits  has  also  tended  to  strengthen  the 
bonds  betw^een  these  other  institutions  and  the  people.  In 
catering  to  the  banking  needs  of  the  masses,  however,  these 
other  banks  have  not  been  able  to  dispense  with  the  aid  of 
the  Bank  of  France.  Not  possessing  the  right  to  issue  notes, 
and  being  unable  to  attract  deposits  sufficient  to  supply  them 
with  the  necessary  working  capital,  they  have  been  obliged 
to  depend  upon  her  for  funds  for  current  uses,  as  well  as 
for  the  means  of  meeting  the  exigencies  of  abnormal  times. 
These  they  have  been  able  to  secure  through  rediscounts 
and  advances.  A  large  part  of  the  bills  regularly  presented 
to  them  for  discount  can  be  made  acceptable  to  the  Bank 
of  France  by  adding  their  own  endorsements  or  by  putting 
up  the  kind  of  collateral  prescribed  in  the  Bank's  statutes. 
The  same  kind  of  collateral,  readily  obtainable  b}-  banks 
though  not  regularly  in  the  possession  of  the  ordinary  busi- 
ness man,  together  with  the  foreign  coin  and  bullion  com- 
ing into  their  possession  through  regular  customers  or 
purchases  on  the  market,  may  be  used  as  a  basis  for  loans. 
By  availing  themselves  of  these  means  they  have  become 
an  intermediary  between  the  industrial  and  the  commercial 
world  and  the  Bank  of  France  which,  with  the  growth  of  the 
great  banks,  has  tended  more  and  more  to  become  a  bank- 
ers' bank.  Its  doors  are  still  wide  open  and  its  services 
available  directly  by  any  citizen  who  can  or  will  comply 
with  the  conditions  for  doing  business  which  the  law  com- 
pels it  to  impose,  but  the  ordinary  business  man  finds  the 


Banking  in  France  255 

other  banks  alone  able  to  satisfy  all  his  needs  and  more 
economical  and  convenient  in  most  cases  in  which  he  has 
an  option  between  them  and  the  Bank  of  France. 

Moreover  these  banks,  especially  the  four  largest  ones, 
have  exhibited  considerable   ingenuity   in  adapting   them- 
selves to  the  needs  of  the  public.     They  have  added  to  the 
functions  of  commercial  banking,  strictly  so-called,  those 
of  acting  as  agents  for  the  marketing  of  public  and  corpora- 
tion securities  and  sometimes  of  promoting  new  enterprises. 
In  this  capacity  they  have  connected  themselves  with  the 
stockmarkets  and  have  become  the  regular  avenues  through 
which  their  customers  make   investments.     They  usually 
keep  on  hand  a  choice  selection  of  high  class  securities 
which  they  can  turn  over  to  buyers  on  short  notice  and  they 
regularly  execute  orders  for  the  purchase  and  sale  of  such 
securities  as  they  cannot  themselves  supply.    Through  their 
luxuriously  appointed  offices  and  their  careful  attention  to 
the  comfort  of  their  customers  they  have  also  added  con- 
siderably to  the  strength  of  their  purely  commercial  appeal. 
The  Bank  of  France  also  exerts  an  important  influence 
over  other  institutions  in  the  exercise  of  its   function  of 
guardian  of  the  country's  specie   reserve.     This   function 
has  not  been  directly  conferred  upon  it  by  law,  but  it  is  a 
natural  consequence  of  the  possession  of  a  monopoly  of 
note-issues  and  of  its  service  as  a  bankers'  bank.    It  is  com- 
pelled by  law  to  redeem  its  notes  in  specie  on  demand  and, 
as  we  have  seen,  the  other  banks  mainly  depend  upon  it 
for  their  supplies  of  cash.    Being  also  the  banker  of  the  gov- 
ernment it  has  become  perforce  the  central  monetary  reser- 
voir of  the  country  and  has  been  obliged  to  assume  the  re- 
sponsibility of  protecting  that  reservoir  against  the  assaults 
of  other  financial  centers.    This  it  does  by  raising  or  lower- 
ing the  rate  of  discount  and  by  availing  itself  of  the  option 
permitted  it  by  law  to  pay  its  notes  either  in  gold  or  in 


256  Money  and  Banking 

silver  five  franc  pieces.  By  the  former  means  it  may  af- 
fect the  discount  rate  of  the  other  banks.  Since  they  are 
obliged  to  secure  funds  from  the  Bank  of  France  they  must 
adjust  their  charges  to  the  public  to  the  Bank's  charges  to 
them.  Ordinarily,  therefore,  the  market  rate  of  discount 
responds  to  movements  in  the  Bank  rate,  and  thus  the  Bank 
may  exert  a  regulative  influence  on  all  those  departments 
of  commercial  and  industrial  life  which  are  affected  by  the 
cost  of  obtaining  funds  through  commercial  discounts  and 
loans. 

REFERENCES 

On  the  history  of  banking  in  France  see  Liesse,  Evolution  of  Credit 
and  Banks  in  France,  published  by  the  National  Monetary  Commis- 
sion ;  Des  Essars,  A  History  of  Banking  in  the  Latin  Nations  in  v. 
Ill  of  a  history  of  Banking  in  all  the  leading  Nations ;  Conant,  Mod- 
ern Banks  of  Issue,  ch.  iii ;  Dunbar,  ch.  viii ;  Courtois,  Histoire  des 
Banques  en  France;  Bousquet,  La  Banque  de  France  et  les  Institutions 
de  Credit;  Flour  de  Saint-Genis,  La  Banque  de  France  a  trovers  le 
Siecle,  and  Sayous,  Les  Banques  de  Depot,  les  Banques  de  Credit  et 
les  Socictcs  Financieres. 

The  various  laws  and  statutes  which  have  regulated  the  Bank  of 
France  since  its  foundation  are  published  in  a  volume  entitled  Lois 
et  Statuts  qui  regisscnt  la  Bar   uc  de  France. 

On  the  relations  of  the  Bank  of  France  with  the  French  govern- 
ment see  Pommier,  La  Banque  de  France  et  L'Etat  dcpuis  sa  creation 
jusqu'a  Nos  Jours. 

On  the  details  and  workings  of  the  French  system  see  Interviezvs  on 
the  Banking  and  Currency  Systems  of  England,  Scotland,  France, 
Germany,  Switzerland  and  Italy  and  Patron,  The  Bank  of  France  in 
its  relation  to  National  and  International  Credit  published  by  the  Na- 
tional Monetary  Commission. 

See  also  the  references  at  the  close  of  ch.  xv. 


CHAPTER  XIV 
BANKING  IN  GERMANY 

Banking  in  Germany  has  passed  through  three  stages 
of  development.  During  the  first,  extending  to  about  the 
year  1848,  the  business  was  confined  almost  exclusively 
to  private  bankers  and  to  a  few  banks  of  issue,  of  which 
the  Bank  of  Prussia  was  the  chief.  During  the  second, 
extending  from  1848  to  1870,  incorporated  banks  entered 
the  field  on  a  relatively  large  scale  extending  the  scope  of 
the  business  as  well  as  its  constituency  and  greatly  increas- 
ing the  number  of  institutions.  Most  of  the  great  private 
banks  of  the  present  day  date  their  beginnings  to  this  epoch. 
The  third  period,  extending  from  1870  to  the  present  day, 
is  characterized  by  the  foundation  of  the  Imperial  Bank 
and  its  development  into  a  great  central  institution  ranking 
in  importance  and  functions  with  the  Bank  of  England 
and  the  Bank  of  France,  and  by  the  concentration  of  about 
80  per  cent,  of  the  commercial  banking  business  of  the 
country  into  the  hands  of  eight  great  institutions  with  head 
ofHces  in  Berlin,  and  by  the  expansion  of  these  institutions 
into  foreign  territory. 

I.  The  Period  preceding  1848. — In  Germany,  as  elsewhere 
in  Europe,  banking  functions  were  perfonned  by  indi- 
viduals and  unincorporated  firms  from  very  early  times, 
and,  with  the  exception  of  municipal  institutions  of  the  type 
of  the  old  bank  of  Amsterdam,  developed  in  Ham.burg  and 
Nuremberg  in  the  early  years  of  the  seventeenth  century, 

257 


258  Money  and  Banking 

they  seem  to  have  had  the  field  to  themselves  until  1765 
when  Frederick  the  Great  established  a  state  bank  in  Berlin. 
This  institution  developed  into  the  Bank  of  Prussia  which 
was  later  transformed  into  the  Imperial  Bank  of  Germany. 
Its  original  constitution  was  several  times  modified  by  acts 
and  decrees  the  most  important  of  which  was  passed  Oct.  15, 
1846.  By  this  act  the  capital  of  the  bank  was  raised  to  10,- 
000,000  thalers  and  provision  was  made  for  the  accumula- 
tion of  a  surplus  amounting  to  50  per  cent,  of  the  capital. 
Its  maximum  note  issue  was  fixed  at  15,000,000  thalers, 
and  it  was  provided  that  these  must  be  covered  one-third 
by  coin  or  silver  bullion,  one-half  by  bills  of  exchange 
running  not  more  than  three  months  and  provided  usually 
with  three  and  at  least  with  two  good  signatures,  and  the 
remainder  by  loans  on  collateral.  Its  discounts  were  limited 
to  the  class  of  bills  just  described,  but  it  was  permitted 
to  make  loans  on  the  security  of  merchandise  and  public 
securities  at  a  maximum  rate  of  interest  of  six  per  cent.  Its 
government  was  entrusted  to  a  governor  appointed  by  the 
state,  and  a  board  of  directors  consisting  of  five  persons 
and  a  president  appointed  also  by  the  state.  The  stock- 
holders were  represented  in  the  management  by  a  committee 
of  fifteen  whose  authority,  however,  was  confined  to  con- 
sultation with  the  directors  and  the  governor.  Expansion 
into  the  provinces  by  the  establishment  of  branches  began 
early  and  was  continued  until  the  Bank  was  thus  represented 
in  all  the  important  towns  of  the  kingdom. 

October  14,  1772,  Frederick  the  Great  established  another 
institution  destined  to  become  important,  namely  the  so- 
called  Seehandlungs-Sozietat.  Its  purpose  was  stated  to 
be  the  promotion  of  "the  transportation  business  by  sea 
under  the  Prussian  flag,"  and  the  furtherance  of  "the  busi- 
ness of  exportation  and  importation,  particularly  with  Spain 
and  all  other  places  in  which  reasonable  prospects  for  such 


Banking  in  Germany  259 

business  should  appear."  As  a  matter  of  fact  it  became 
the  chief  agent  of  the  Prussian  government  in  a  number 
of  industrial  and  fiscal  undertakings  and  ultimately  added 
banking  to  its  functions.  Since  the  transformation  of  the 
Bank  of  Prussia  into  the  Imperial  Bank  it  has  served 
as  the  chief  financial  agent  of  the  Prussian  government 
and  of  the  various  institutions  conducted  under  the  aus- 
pices of  that  state. 

Frederick  the  Great  also  laid  the  foundation  of  a  sys- 
tem of  land  banks  which  have  played  an  important  role 
in  the  economic  history  of  Germany.  On  account  of  the 
great  need  of  capital  for  the  improvement  of  agriculture, 
and  the  inability  of  the  agricultural  classes,  impoverished  by 
his  wars,  to  command  it  unaided  through  loans,  he  es- 
tablished credit  associations  based  on  the  principle  that  all 
the  members  of  an  association,  together  with  all  the  lands 
in  their  possession,  should  jointly  become  security  for  the 
money  borrowed  and  employed  by  each  one  in  the  improve- 
ment of  his  lands.  This  principle  has  since  been  widely  ap- 
plied through  banking  institutions  differing  from  each  other 
considerably  in  other  respects. 

Outside  of  Prussia  banks  were  established  in  Bremen 
in  181 7,  in  Liibeck  in  18 19,  in  Stettin  in  1824,  in  Munich  in 
1835  and  in  Leipzig  in  1838. 

2.  The  Period  1848  to  1870. — About  the  middle  of  the 
nineteenth  century  German  industry,  as  distinguished  from 
agriculture,  began  to  develop  rapidly  under  the  stimulus  of 
railroads,  the  first  line  of  which  was  constructed  in  1835. 
According  to  reliable  estimates  the  amount  of  capital  in- 
vested in  railroads  increased  from  1,038,000  marks  in  1850 
to  4,072,167,621  marks  in  1870.  *  During  the  same  period 
the  annual  production  of  pig  iron  increased  from  208,000,- 

*Engel  cited  by  Diouritch  in  his  I'Expansion  des  Banques  Al- 
lemandes  a  I'Etranger,  p.  15. 


26o  Money  and  Banking 

000  to  2,029,000,000  kilogrammes,  and  that  of  coal  in 
even  greater  proportions.  Joint-stock  companies  became 
popular  as  a  result  of  this  movement,  two  hundred  ninety- 
five  with  a  capital  of  2,405,000,000  marks  having  been  es- 
tablished in  Prussia  in  the  period  1851-1870  against  one 
hundred  two  with  638,000,000  marks  capital  in  the  period 
1826-1850.* 

The  growth  of  banking  institutions  was  a  natural  result 
of  these  industrial  changes,  but  the  direction  which  it  took 
was  determined  partly  by  a  reaction  against  the  monopoliza- 
tion of  the  issue  function  by  a  few  banks,  which  doubtless 
was  connected  with  the  political  agitation  in  favor  of  popu- 
lar rights  which  characterized  the  opening  years  of  the 
period.  In  1836  all  bank-note  issues  were  suppressed  in 
Prussia  in  order  to  leave  a  free  field  for  government  notes. 
Later  the  Bank  of  Prussia  was  allowed  to  resume  its  issues 
and  in  the  early  forties  an  agitation  w^as  started  in  favor 
of  extending  the  privilege  to  private  institutions.  The 
bank  act  of  1846,  which  greatly  increased  the  capacity  of 
the  Bank  of  Prussia  to  serve  the  public,  not  being  sufficient 
to  quiet  this  agitation,  an  act  was  passed  Sept.  5,  1848,  au- 
thorizing the  establishment  of  private  banks  of  issue,  but 
limiting  their  aggregate  circulation  to  7,000,000  thalers. 
The  movement  in  favor  of  private  banks  of  issue  extended 
beyond  the  bounds  of  the  Kingdom  of  Prussia.  During  the 
period  under  consideration  such  banks  were  established 
at  Berlin,  Breslau,  Posen,  Magdeburg,  Dantzig,  Cologne, 
Konigsburg,  Gorlitz,  Gera,  Frankfurt  a/m,  Sonderhausen, 
Hamburg,  LiJbeck,  Gotha,  Meiningen,  Bucheburg,  Hanover, 
Bremen,  Leipzig  and  Oldenburg.  Some  of  them  were  the 
work  of  speculators  and  their  bad  management  resulted 
even  before  the  Franco-Prussian  war  in  an  agitation  in 


*&' 


*Engel    cited    by    Diouritch    in    his    I'Expansion    des    Banques    Al- 
lemandes  a  I'Etranger,  pp.  15  and  16. 


Banking  in  Germany  261 

favor  of  the  monopolization  of  the  right  of  issue  by  larger 
institutions. 

Besides  these  banks  of  issue  there  was  established  during 
the  period  a  considerable  number  of  banks  of  discount. 
The  first  of  these  was  the  Schaffhausensche  Bankverein, 
established  at  Cologne  in  the  year  1848.  The  next  was  the 
Diskonto  gesellschaft  established  at  Berlin  in  185 1,  fol- 
lowed by  the  Bank  fiir  Handel  und  Industrie  established  at 
Darmstadt  in  1853.  In  1856  appeared  the  Berliner  Handels- 
gesellschaft,  the  Hamburg  Vereinsbank,  the  Norddeutsche 
Bank  and  the  Schlesischer  Bankverein.  To  this  list  was 
added  the  Deutsche  Genossenschaftsbank  in  1864,  the  Bar- 
mer  Bankverein  and  the  Magdeburg  Bankverein  in  1867, 
the  Breslauer  Diskontobank,  the  Deutsche  Bank,  the  Ham- 
burger Kommissions-und  Diskontobank,  and  the  Rlieini- 
sche  Kreditbank  in  1870,  the  Bergisch-Markische  Bank, 
the  Braunschweigische  Kredit-anstalt,  the  Breslauer  Wech- 
selbank,  the  Deutsche  Vereinsbank,  the  Kolner  Wechsel- 
und  Kommissionsbank,  and  the  Konigsberger  Vereinsbank 
in  1 87 1,  the  Deutsche  Effekten-und  Wechselbank,  the 
Dresdener  Bank,  the  Essener  Kredit-anstalt  and  the  Aache- 
ner  Diskontobank  in  1872,  and  in  1873  the  Deutsche  Union- 
bank.  * 

These  banks  catered  primarily  to  the  new  industrial  es- 
tablishments of  the  period.  With  the  exception  of  some  of 
the  larger  private  firms  the  other  institutions  clung  to  old 
methods  and  continued  to  operate  within  the  old  tradi- 
tional field,  which  was  much  narrower,  with  the  result 
that  they  were  soon  outdistanced  by  their  more  enterprising 
rivals. 

3.  The  Period  1870  to  the  present  day. — At  the  close  of 

*According  to  a  table  published  in  the  Deutsche  Ockonomist,  xxiv, 
1906,  p.  36,  sixty-five  joint-stock  banks  of  the  type  of  these  were  es- 
tablished up  to  1870.     Diouritch,  op.  cit.,  p.  20. 


262  Money  and  Banking 

the  Franco-Prussian  war  in  1871  Germany  entered  upon  a 
regime  of  unification  which  included  her  monetary  and 
banking  systems.  By  acts  passed  in  1871  and  1873  pro- 
vision was  made  for  an  Imperial  coinage  and  for  its  substi- 
tution for  the  local  systems  then  in  use  and  in  1875  ^^  '^ct 
was  passed  for  the  purpose  of  unifying  the  banking  system. 
The  latter  act  provided  for  the  establishment  of  an  Imperial 
Bank  and  for  the  limitation  and  the  regulation  of  the  issues 
of  all  other  banks  enjoying  the  issue  privilege. 

As  a  foundation  for  the  Imperial  Bank  it  authorized  the 
purchase  of  the  Bank  of  Prussia.  Its  capital  was  fixed  at 
120,000,000  marks  and  provision  was  made  for  the  accumu- 
lation of  a  surplus  equal  to  25  per  cent,  of  the  capital.  Its  ad- 
ministration and  supervision  were  entrusted  to  a  board  of 
curators,  a  board  of  directors  and  a  central  committee  of 
stockholders.  It  was  made  the  duty  of  the  board  of  cura- 
tors, which  was  to  consist  of  the  Chancellor  of  the  Empire 
and  of  four  other  persons,  one  to  be  appointed  by  the 
Emperor  and  the  other  three  by  the  Imperial  Council,  to 
exercise  supervision  over  the  conduct  of  the  Bank's  affairs, 
and  to  this  end  complete  reports  regarding  its  operations 
were  to  be  submitted  at  meetings  held  quarterly.  The 
board  of  directors  was  to  consist  of  a  president,  a  vice 
president  and  seven  other  members  to  be  appointed  for  life 
by  the  Emperor  on  the  nomination  of  the  Imperial  council. 
To  this  body  was  entrusted  the  administration  of  the  Bank, 
the  appointment  of  subordinate  officers  and  clerks  being 
made  a  duty  of  the  president.  The  Central  Committee 
represents  the  stockholders  who  appoint  it  at  their  regular 
annual  meetings.  This  committee  is  required  to  meet  at 
least  once  each  month  and  to  receive  reports  regarding  the 
Bank's  operations  and  condition.  Its  powers  are  advisory 
only,  except  in  the  matter  of  the  amount  of  securities  to  be 
purchased,  and  in  that  of  business  with  the  government,  in 


Banking  in  Germany  263 

which  it  has  the  right  of  veto.  From  its  members  the  Cen- 
tral Committee  is  required  to  select  three  representatives 
whose  duty  it  is  to  attend  all  meetings  of  the  board  of 
directors  and  from  time  to  time,  in  the  presence  of  a  mem- 
ber of  that  board,  to  examine  the  books  of  the  Bank  and 
to  witness  the  counting  of  the  cash. 

The  business  of  the  Bank  was  defined  in  the  following 
terms : 

"a.  To  buy  and  sell  gold  and  silver  coin  and  bullion. 

b.  To  discount,  buy  and  sell  bills  of  exchange  whose 
maturity  shall  be  three  months  at  the  longest,  and  for  which 
usually  three,  and  in  no  case  less  than  two  accredited 
vouchers  shall  stand  good;  furthermore,  to  discount,  buy 
and  sell  bonds  of  the  Empire  or  of  any  German  state,  or  do- 
mestic municipal  corporations,  provided  such  bonds  mature 
within  three  months  at  the  longest  and  conform  to  the 
new  standards  of  value. 

c.  To  grant  interest-bearing  loans  for  terms  no  longer 
than  three  months,  upon  movable  security  (lombard,  or 
deposit  loan  business),  such  as:  Gold  and  silver,  coined  or 
uncoined ;  interest-bearing  or  non-transferable  bonds  ma- 
turing within  a  maximum  term  of  three  months,  whether 
of  the  Empire,  a  German  state,  or  of  domestic  municipal 
corporations;  also  interest-bearing  non-transferable  bonds 
on  which  the  interest  is  guaranteed  by  the  Empire  or  by  any 
one  of  the  German  states;  upon  capital  stock  and  stock 
priority  shares,  fully  paid  up,  of  German  railway  companies 
in  actual  operation;  and  on  mortgage  bonds  of  provincial, 
municipal,  or  other  land  credit  institutions  of  Germany  that 
are  subject  to  State  control  including  shares  of  German 
mortgage  banks  to  an  amount  never  exceeding  three-fourths 
of  their  market  value;  upon  interest-bearing  non-transfer- 
able bonds  of  foreign  states,  and  foreign  railway  priority 
bonds,  covered  by  state  security,  in  amounts  not  exceeding 
50%  of  their  market  value ;  upon  bills  of  exchange  of  recog- 
nized soundness,  after  deducting  at  least  5%  of  their  market 
value ;  on  pledges  of  native  merchandise,  in  amounts  within 
two-thirds  of  their  value. 


264  Money  and  Banking 

d.  To  negotiate  collections  for  the  account  of  individuals, 
institutions  and  governing  boards;  and  upon  security,  as 
before  mentioned,  to  furnish  payments,  and  make  orders  or 
conveyances  on  the  branch  banks  or  on  correspondents. 

e.  Upon  prior  security,  to  buy  in  behalf  of  outside  parties, 
effects  of  all  kinds,  including  the  precious  metals ;  and  after 
delivery  to  sell  the  same. 

f.  To  receive  moneys  in  circulation  or  on  deposit,  with 
or  without  interest ;  but  the  sum  of  interest-bearing  deposits 
must  not  exceed  that -of  the  capital  stock  and  reserve  fund. 

g.  To  accept  the  custody  or  other  management  of  objects 
of  value." 

The  Imperial  Bank  was  further  placed  under  obligation 
to  receive  and  make  payments,  without  compensation,  for 
the  account  of  the  empire  or  for  any  of  the  German  states. 
It  was  permitted  to  issue  notes  on  condition  that  it  hold  at 
least  one-third  of  the  quantity  in  circulation  in  cash,  and 
the  other  two-thirds  in  discounted  bills  maturing  in  not  less 
than  three  months  and  signed  with  the  names  usually  of 
three,  but  at  least  of  two  solvent  persons ;  and  on  condition 
that  it  pay  a  tax  of  five  per  cent,  per  annum  to  the  govern- 
ment for  all  issues  in  excess  of  an  amount  equal  to  its  cash 
holdings  plus  a  fixed  sum,  later  placed  at  250,000,000  marks. 

The  Bank  was  permitted  to  establish  branches  in  every 
part  of  the  empire,  and  required  so  to  do  when  directed  by 
the  federal  council  or  the  Imperial  Chancellor. 

With  regard  to  the  thirty-two  other  banks  of  issue  in 
existence  at  the  time,  provision  was  made  for  their  con- 
tinuance as  independent  banks  under  existing  regulations 
or  as  parts  of  the  Imperial  system.  Banks  which  chose 
to  remain  outside  of  the  Imperial  system  were  forbidden  to 
establish  branches  or  agencies  or  to  circulate  their  notes 
outside  of  the  state  in  which  they  were  located.  Banks 
which  chose  to  enter  the  Imperial  system  were  forced  to 
conform  in  regard  to  their  issues  to  substantially  the  same 


Banking  in  Germany  265 

regulations  as  those  imposed  upon  the  Imperial  Bank,  and 
the  amount  of  uncovered  issues  were  fixed  for  each  bank. 
The  empire  also  reserved  the  right  to  deprive  each  bank 
of  the  privilege  of  issue  upon  giving  one  year's  notice,  Jan- 
uary I,  1 89 1,  or  any  tenth  year  thereafter.  It  agreed,  how- 
ever, not  to  exercise  this  right  except  in  the  interest  of  the 
unification  of  the  banking  system  of  the  empire  or  as  a 
punishment  for  the  violation  of  law. 

As  was  contemplated  by  the  framers  of  the  act,  its  effect 
was  gradually  to  bring  about  the  monopolization  of  note 
issues  by  the  Imperial  Bank.  Before  the  close  of  the  year 
1877,  fifteen  of  the  thirty-two  original  banks  of  issue  had 
given  up  their  right  and  the  quota  assigned  to  the  Imperial 
bank  increased  by  the  same  amount.  In  1886  another  bank 
ceased  to  issue,  in  1887  still  another,  in  1889  two  more, 
in  1890  one,  in  1891  four,  in  1894  one,  in  1902  two,  and  in 
1905  one  leaving  only  four  in  the  entire  empire. 

The  growth  of  the  Imperial  Bank  has  been  as  rapid  as 
could  have  been  expected.  Its  capital  has  been  raised  to 
180,000,000  marks.  Its  branches,  which  numbered  at  the 
beginning  about  two  hundred,  had  increased  by  1899  to 
three  hundred  ten,  by  1900  to  three  hundred  thirty,  by 
Jan.  I,  1903  to  three  hundred  fifty-four,  and  by  Jan.  i, 
19 10  to  about  five  hundred.  The  magnitude  of  its  business 
in  all  lines  has  increased  and  it  has  become  in  every  sense  of 
the  word  the  center  of  banking  operations  in  the  German 
Empire.  Its  authorized  untaxed  note  circulation  previous 
to  1899  had  been  raised  to  293,400,000  marks  by  the  re- 
nunciation of  the  right  of  issue  by  other  banks,  and  by  a  law 
passed  June  7,  1899,  it  was  still  further  raised  to  450,000,- 
000  marks.  Since  that  date  it  has  been  raised  to  472,800,- 
000  marks  by  the  renunciation  of  the  right  of  issue  by  three 
other  banks.  An  act  passed  June,  1909,  provided  that  begin- 
ning with  191 1  the  untaxed  issues  might  be  increased  to 


266  Money  and  Banking 

550,000,000  marks  with  a  supplement  of  200,000,000  marks 
additional  at  the 'ends  of  March,  June,  September  and  De- 
cember when  the  pressure  upon  the  bank  is  greatest,  the 
aggregate  uncovered  circulation  to  be  limited  to  618,000,- 
000  marks,  when  the  tax-free  issue  is  at  the  former  figure 
and  to  818,771,000  marks  at  the  ends  of  the  quarters  when 
the  tax-free  issues  are  raised  to  750,000,000  marks. 

Next  in  importance  to  the  growth  of  the  Imperial 
Bank,  and  the  gradual  disappearance  of  most  of  the  other 
banks  of  issue,  is  the  concentration  of  most  of  the  purely 
commercial  banking  business  of  the  country  in  the  hands  of 
nine  large  institutions.  Five  *  of  these  were  in  existence 
when  the  period  opened,  and  the  four  others  were  very  soon 
after  established,  the  Deutsche  Bank  with  a  capital  of  15,- 
000,000  marks,  and  the  Commerz  and  Disconto  Bank  with 
a  paid  capital  of  15,000,000  marks  in  1870;  the  Dresdner 
Bank  with  a  paid  capital  of  9,600,000  marks  in  1872,  and 
the  National  bank  fiir  Deutschland  with  a  paid  capital  of 
20,000,000  marks  in  1 881.  During  the  first  three  years  of 
the  period  there  were  also  established  a  large  number  of 
other  joint-stock  banks,**  but  the  crisis  of  1873  revealed 
the  weakness  of  most  of  them  and  marked  the  beginning 
of  the  process  of  concentration  which  has  continued  to  the 
present  day.  The  nine  institutions  just  mentioned  possessed 
the  vitality  and  power  requisite  not  only  to  withstand  the 
force  of  the  crisis,  but  to  take  advantage  of  it  by  absorbing 
their  weaker  brethren.  Between  the  years  1873  and  1879 
they  grew  enormously  in  influence  and  resources  while  at 
the  latter  date  only  one  hundred  twenty-seven  of  the  two 

*The  Bank  fiir  Handel  and  Industrie,  the  Disconto  gesellschaft, 
the  Berliner  Handelsgesellschaft,  the  A.  Schaffhausensche  Bankverein 
and   the   Mitteldeutsche   Kreditbank. 

**The  Deutsche  Ockonomist  v.  xxiv,  1906,  p.  35,  places  the  number 
established  between  1871  and  1873  at  one  hundred  thirty-two.  Cited  by 
Diouritch  p.  29. 


Banking  in  Germany  267 

hundred  and  two  banks  in  existence  at  the  end  of  1872  still 
survived  as  independent  institutions.  * 

In  the  decade  1880  to  1890  the  financial  center  of  Ger- 
many was  transferred  from  Frankfurt  a/m  to  Berlin,  and 
these  banks  made  the  Imperial  city  the  center  of  their  opera- 
tions. From  here  they  proceeded  to  extend  their  influence 
over  the  entire  empire  and  into  the  German  colonies  and 
foreign  countries  by  the  establishment  of  branches  and 
agencies,  by  the  purchase  of  controlling  interests  in  provin- 
cial banks,  by  the  creation  of  banks  independent  in  form 
but  actually  controlled  by  them,  by  the  establishment  of  a 
community  of  interest  between  themselves  and  other  banks 
in  other  ways  and  by  connecting  themselves  in  a  vital  manner 
with  the  rapid  industrial  and  commercial  development  of 
the  country.  They  thus  became  the  heads  of  eight  groups 
of  banking  institutions  controlling  between  them  about  80 
per  cent,  of  the  banking  capital  of  the  empire.**  Of  these 
groups  those  headed  by  the  Dresdner  Bank,  the  Dresdner 
Bank  and  the  A.  Schaffhausenche  Bankverein  (consoli- 
dated), the  Disconto  gesellschaft,  and  the  Bank  fiir  Handel 
und  Industrie  are  much  the  largest,  their  combined  capital 
and  deposits  in  1906  amounting  to  8,231.47  millions  of 
marks  out  of  a  grand  total  of  9,565.64  millions  for  the  eight 
groups,  and  of  11,394  millions  for  all  the  banks  of  the 
country. 

4.  Mortgage  and  Cooperative  Banks. — Besides  these  com- 
mercial banks  there  have  developed  in  Germany  a  consider- 
able number  of  mortgage  banks  and  a  large  number  of 
cooperative  banking  associations.  These  institutions  exist 
primarily  in  the  interests  of  classes  not  served  by  the  com- 
mercial banks  such  as  landowners,  peasants,  artisans  and 
small  tradesmen,  and  they  also  extend  credit  to  small  towns 

*  Diouritch  p.  30. 
**Ibid,  p.  2,1- 


268  Money  and  Banking 

and  other  small  political  corporations.  The  mortgage  bank 
secures  funds  mainly  by  the  sale  of  bonds,  and  lends  them 
on  real  estate  security  or  to  small  towns  or  other  local  politi- 
cal corporations,  putting  up  the  mortgages  and  the  securities 
it  receives  as  well  as  its  own  capital  as  security  for  its  bonds. 
Some  of  them  lend  primarily  to  owners  and  dealers  in  city 
real  estate,  and  others  to  farmers  and  owners  of  large 
country  estates.  Still  others  lend  considerable  amounts 
to  small  towns  and  other  local  political  corporations. 

The  cooperative  societies  differ  considerably  among  them- 
selves in  minor  particulars,  but  they  are  all  based  on  the 
principle  of  mutual  responsibility  of  each  member  for  the 
obligations  of  the  society.  The  most  popular  of  these  are 
the  Schulze-Delitzsch  associations  so  called  because  they 
were  first  organized  in  a  town  called  Delitzsch  by  a  Doctor 
Schulze.  The  earliest  of  these  date  back  to  1848  and  were 
organized  for  the  purpose  of  purchasing  merchandise  such 
as  sugar,  coffee,  grain,  wines,  cigars,  etc.  Others  were 
afterwards  organized  for  production  as  well  as  sale,  and 
later  still  others  for  the  purpose  of  stimulating  saving  and 
extending  credit  to  their  members.  These  latter  constitute 
at  the  present  time  an  important  group  of  banks  for  the 
people.  Members  are  required  to  purchase  one  share  of  the 
capital  stock,  the  amount  of  which  varies  between  different 
societies,  and  in  most  societies  each  member  is  responsible 
to  the  full  extent  of  his  property  for  all  the  debts  of  the  or- 
ganization. A  law  was  passed  May  i,  1889,  permitting  the 
limitation  of  the  liability  of  members  to  a  fixed  sum,  but 
few  societies  have  availed  themselves  of  it.  During  the 
early  years  of  their  history  most  of  the  funds  lent  to  their 
members  were  borrowed  from  outsiders  but,  as  they  became 
more  popular,  their  deposits  increased,  and  at  the  present 
time  many  of  them  find  difficulty  in  investing  the  funds 


Banking  in  Germany  269 

left  with  them  without  going  outside  of  the  circle  of  cus- 
tomers whom  they  are  designed  primarily  to  serve. 

The  so-called  Rafifeisen  system  of  cooperative  banks 
dates  back  to  1864,  when  Frederick  William  Raififeisen 
founded  in  Heddesdorf,  Prussia,  the  so-called  Heddesdor- 
fer  Darlehnskassenverein.  Other  associations  of  the  same 
kind  were  established  in  1868  and  each  year  thereafter. 
These  associations  were  designed  primarily  to  serve  peas- 
ants and  small  farmers,  while  the  Schulze-Delitzsch  socie- 
ties originally  operated  chiefly  among  artisans  and  small 
tradesmen  of  towns  and  cities.  Both  have  extended  their 
membership  beyond  the  classes  for  which  they  were  origi- 
nally designed,  however,  and  cannot  now  be  differentiated 
on  the  basis  of  the  character  of  their  membership.  The 
Raiffeisen  societies  begun  without  capital  and,  when  they 
were  compelled  by  law  to  accumulate  a  capital  stock,  they 
kept  the  amount  small.  It  was  the  purpose  of  the  founder 
to  assist  peasants  and  small  farmers  to  escape  from  the 
exactions  of  money  lenders  of  the  usurious  type,  and  to 
secure  credit  which,  in  most  cases,  would  otherwise  have 
been  impossible  on  any  terms.  To  this  end  he  appealed  to 
the  same  principle  as  did  Schultze-Delitzsch,  namely,  the 
ability  to  borrow  money  on  good  terms,  provided  all  the 
members  of  a  society  assume  liability  for  its  debts  to  the 
full  extent  of  their  properties.  Inasmuch  as  it  was  credit- 
needy  people  whom  he  wished  to  serve  he  did  not  approve 
of  the  plan  of  requiring  the  purchase  of  shares  of  capital 
stock  as  a  condition  of  membership.  On  account  too  of  the 
differences  in  the  needs  and  capabilities  of  the  classes 
served  these  two  kinds  of  organizations  also  differed  in  the 
length  of  the  periods  for  which  loans  were  granted,  the 
Schulze-Delitzsch  societies  granting  short-period  and  the 
Raiffeisen  long-period  loans. 

The  Raiffeisen  societies  within  a  given  district  are  or- 


2/0  Money  and  Banking 

ganized  into  unions  each  one  of  which  has  a  bank  which 
receives  on  deposit  the  surplus  funds  of  the  societies,  grants 
them  loans  and  in  other  ways  renders  them  all  possible 
assistance.  As  a  central  bank  for  all  of  these  unions,  and 
for  other  cooperative  associations,  agricultural  loan  com- 
panies, savings  banks,  etc.,  in  the  Kingdom  of  Prussia  there 
was  established  in  1895  the  Preussische  Central-Genossen- 
schaftskasse.''  Its  capital  of  at  first  5,000,000  marks,  after- 
ward increased  to  20,000,000  and  then  to  50,000,000 
marks,  was  furnished  by  the  Prussian  State.  In  1906  it 
was  again  increased  by  2,400,000  marks  subscribed  by  the 
various  unions  of  the  Raiffeisen  system.  In  the  other  Ger- 
man states  the  Raiffeisen  societies  have  established  relations 
with  commercial  banks  similar  to  those  established  in  Prus- 
sia with  this  institution.  Until  1904  the  Schulze-Delitzsch 
societies  had  a  central  bank  of  their  own  known  as  the 
Deutsche  Genossenschaftsbank.  At  that  date  this  bank  be- 
came embarrassed  and  was  absorbed  by  the  Dresdner 
Bank  which  now  serves  as  the  central  association  for  the 
Schultze-Delitzsch  societies.  Unlike  the  Raffeisen  associ- 
ations each  of  these  societies  deals  directly  with  the  cen- 
tral bank. 

5.  The  present  organization  of  the  banking  business  in 
Germany. — To  some  extent  the  various  groups  of  institu- 
tions already  described  are  competitors.  They  all  receive 
deposits  and  they  all  discount  certain  kinds  of  bills  of  ex- 
change, but  in  the  main  their  fields  of  operation  are  dis- 
tinct and  different.  The  Imperial  Bank  transacts  the  bank- 
ing business  of  the  Imperial  Government,  administers  the 
country's  specie  reserve  and  regulates  the  circulating  me- 
dium. Its  other  functions  such  as  the  care  of  deposits,  the 
granting  of  credits  and  the  transfer  of  funds  are  purely 
subsidiary  or  supplementary.     The  great  Berlin  banks  are 


Banking  in  Germany  271 

the  chief  banking  servants  of  the  leading  industrial  and 
commercial  agents  of  the  country  and  the  pioneers  of  Ger- 
man industrial  and  commercial  expansion  in  foreign  coun- 
tries and  the  German  colonies.  The  independent  private 
and  provincial  banks  chiefly  serve  special  groups  and  purely 
local  interests.  The  mortgage  banks  and  cooperative  so- 
cieties supply  banking  facilities  to  farmers,  peasants,  arti- 
sans, and  small  tradesmen,  and  extend  credit  to  those  who 
deal  in  real  estate  and  to  the  smaller  political  corpora- 
tions. 

In  spite  of  their  separate  functions,  however,  all  these 
institutions  are  vitally  connected  with  each  other  and  with 
the  Imperial  Bank.  The  cooperative  and  mortgage  banks 
derive  no  insignificant  part  of  the  funds  they  lend  from 
the  great  Berlin  banks  and  the  Imperial  Bank  by  direct 
sales  to  them  of  their  securities,  by  rediscounts  and  loans 
on  collateral.  With  these  they  also  deposit  their  surplus 
funds.  The  Berlin  banks  use  the  Imperial  Bank  as  their 
reserve  agent,  frequently  obtaining  funds  from  it  through 
rediscounts  and  sometimes  through  loans  on  collateral  and 
employ  its  so-called  giro-system*  for  the  transfer  of  funds 
from  one  part  of  the  country  to  another.  The  Imperial 
Bank  is  thus  the  center  and  balance  wheel  of  the  entire  sys- 
tem. It  is  the  central  cash  reservoir  from  which  all  are 
supplied  and  to  which  all  surpluses  flow.  Through  the 
dependance  on  it  of  all  other  credit  institutions  it  is  able, 
at  least  to  a  degree,  to  hold  them  in  check,  when  they  are 
inclined  to  extravagance,  and  to  stimulate  them,  when  they 
are  sluggish.  Its  rate  of  discount  affects  all  other  market 
rates  and  its  attitude  toward  a  financial  enterprise  is 
rarely,  if  ever,  without  influence  on  its  fortunes. 

*  The  name  given  to  the  system  of  transferring  credits  between  the 
central  office  and  the  branches,  or  between  the  different  branches. 


2/2  Money  and  Banking 

REFERENCES 

On  the  history  of  banking  in  Germany  see  Wirth,  The  History  of 
Banking  in  Germany  and  Austria-Hungry  in  v.  ii  of  a  History  of 
Banking  in  all  the  leading  Nations;  Conant,  Modern  Banks  of  Issue, 
ch.  viii;  Dunbar,  ch.  xi;  Reisser,  Zur  Entwicklungskeschichte  der 
deutschen  Grossbanken  mit  besonderer  Riicksicht  auf  die  Konsentra- 
tions-bestrebungen,  to  be  published  in  translation  by  the  National  Mone- 
tary Commission;  The  Reichsbank  1876-1900,  Renewal  of  Reichsbank 
Charter,  and  German  Bank  Inquiry  of  1908,  published  by  the  National 
Monetary  Commission;  Diouritch,  U Expansion  des  Banques  Alle- 
mandes  a  L'Etranger,  ch.  i;  Jeidels,  Das  Verhdltniss  der  deutschen 
Grossbanken  sur  Industrie,  mit  besonderer  Beriicksichtigung  der 
Eisenindustrie ;  Poschinger,  Die  Banken  im  deutschen  Reiche,  Oester- 
reich  und  der  Schweis  and  Bankwesen  and  Bankpolitik  in  Pressen; 
Hecht,  Bankwesen  und  Bankpolitik  in  den  siiddcutschen  Staaten,  1819- 
1875  and  Die  Mannheimer  Banken,  1870-1900.  Nasse  and  Lexis,  article 
Bank  in  Handworterbuch  der  Staatswissenschaften;  Warschauer,  Die 
Konzentratxon  im  deutschen  Bankwesen  and  Die  Organisation  des  Kon- 
sentration  im  deutschen  Bankwesen  and  Die  Organisation  des  Scheck- 
verkehrs  in  Deutschland,  Conrad's  Jahrbuck,  3d  F.,  v.  88,  p.  45,  and  v. 
89.  P-  590;  and  Model,  Die  Grossen  Berliner  Effektenbanken. 

On  the  cooperative  banks  see  Peters,  Cooperative  Credit  Associations, 
U.  S.  Dept.  of  Agriculture,  Div.  of  Statistics,  Misc.  Ser.  No.  3,  1892; 
Wolff,  Peoples  Banks;  and  articles  in  the  Handworterbuch  der  Staats- 
wissenschaften by  Marchet  on  Darlehnskassenvereine  and  by  Criiger  on 
Kreditgenossenschaften. 

See  also  references  at  the  close  of  ch.  xv. 


CHAPTER  XV 
THE  MONEY  MARKET 

In  the  preceding  chapters  the  development  and  present 
state  of  the  machinery  through  which  the  exchanges  of  the 
chief  countries  of  the  world  are  effected  have  been  described. 
The  connection  of  that  machinery  with  other  parts  of  the 
financial  mechanism  and  some  of  the  features  of  its  opera- 
tion remain  for  consideration  in  the  present  chapter, 

I.  The  central  markets.— As  we  have  seen  the  central 
agency  of  the  banking  system  of  each  country  is  located 
in  its  chief  commercial  center,  in  this  country  in  New  York, 
in  England  in  London,  in  France  in  Pafis,  and  in  Germany 
in  Berlin,  In  each  European  country  that  agency  is  the 
central  bank,  but  in  New  York  it  is  the  group  of  banks 
which  constitute  the  Clearing  House  Association,  usually 
known  as  the  Associated  Banks,  and  the  branch  of  the 
United  States  Treasury  there  located,  known  as  the  New 
York  Sub-Treasury.  In  each  of  these  centers  there  are 
also  one  or  more  stock  exchanges  for  the  facilitation  of  the 
purchase  and  sale  of  securities  of  public  and  private  cor- 
porations and  brokerage  firms  who  act  as  intermediaries  in 
the  purchase  and  sale  of  commercial  paper.  These  ex- 
changes and  brokerage  firms  are  essential  parts  of  the 
the  money  market  machinery,  since  they  supply  the  means 
for  the  investment  of  surplus  funds,  and  for  the  speedy 
liquidation  of  those  investments  in  case  of  need.  In  each 
of  these  centers  also  there  are  markets  for  the  purchase 
and  sale  of  the  precious  metals  together  with  the  machinery 


274  Money  and  Banking 

for  their  refining  and  sometimes  for  their  minting  into 
coin. 

These  central  markets  serve  as  reservoirs  and  distributing 
agents  for  the  currency  and  surplus  loan  funds  of  their  re- 
spective countries,  administer  their  reserves  of  specie  and 
conduct  their  foreign  exchanges.  The  facilities  they  have, 
and  the  methods  they  employ  for  the  accomplishment  of 
these  tasks,  will  now  be  described. 

2.  The  central  reserves. — The  central  reserves  held  by  the 
controlling  institutions  of  these  markets  are  subject  to  draft 
from  bankers  in  the  interior  of  their  respective  countries, 
from  foreign  bankers  and  from  local  customers,  and  those 
of  the  Associated  Banks  of  New  York  are  also  subject 
to  draft  from  the  New  York  Sub-Treasury.  They  may  be 
replenished  from  the  same  sources.  The  interior  move- 
ment, as  the  ebb  and  flow  between  these  institutions  and  the 
interior  of  the  country  may  be  called,  depends  upon  the 
volume  and  the  course  of  domestic  commerce  in  all  its 
branches,  the  foreign  movement  upon  the  volume  and  course 
of  foreign  commerce,  and  the  local  movement  upon  the 
volume  and  course  of  the  commerce  of  the  city  in  which  the 
institutions  in  question  are  located.  The  movement  be- 
tween the  Associated  Banks  and  the  sub-treasury  in  New 
York  depends  upon  the  relation  between  the  receipts  and 
expenditures  of  the  government,  and  upon  the  discretion 
of  the  Secretary  of  the  Treasury  in  the  use  of  his  power  to 
deposit  funds  in  the  banks. 

A  knowledge  of  the  volume  and  fluctuations  of  these 
various  currency  movements  is  essential  to  a  proper  admin- 
istration of  these  reserves.  In  order  to  supply  this  knowl- 
edge, statistics  of  the  shipments  of  currency  to  and  from 
the  Associated  Banks,  the  interior,  foreign  countries  and 
the  sub-treasury  are  compiled  and  published  in  the  financial 
journals  of  New  York,  and  similar  statistics  relative  to 


The  Money  Market  275 

England,  France  and  Germany  are  published  in  the  finan- 
cial journals  of  those  countries.  They  indicate  that  in  some 
of  their  fluctuations  these  movements,  especially  the  in- 
terior and  the  foreign,  are  regular  and  in  a  degree  predict- 
able, and  in  others  erratic  and  unpredictable.  In  all  four 
countries  for  example,  the  interior  movement  is  subject  to 
seasonal  influences  as  is  also,  to  a  greater  degree  in  some 
than  in  others,  the  foreign  movement.  The  sub-treasury 
movement  at  New  York  is  very  erratic.  Changes  in  trade 
and  industrial  conditions  constitute  elements  of  uncertainty 
in  all  the  movements  in  all  four  countries. 

The  chief  problem  connected  with  the  administration  of 
these  reserves  is  their  adjustment  to  the  varying  demands 
upon  them  caused  by  these  fluctuating  movements.  It  is  a 
problem  not  susceptible  of  a  rule  of  thumb  solution,  but 
two  points  in  connection  with  it  are  obvious.  One  is  that 
the  banks  which  administer  these  must,  at  all  times,  keep  on 
hand  larger  amounts  of  cash  than  other  banks.  Being  the 
ultimate  sources  of  supply  for  their  respective  countries 
they  cannot  meet  a  deficit  by  drafts  on  other  domestic  in- 
stitutions. For  temporary  purposes  one  market  may  draw 
upon  another,  but  in  the  main  and  in  the  long  run  each  must 
rely  upon  its  own  supply. 

The  second  point  is  that  these  banks  should  keep  a 
large  part  of  their  resources  in  a  liquid  form.  To  this 
end  loans  subject  to  call  or  maturing  in  short  periods  of 
time  are  best  adapted.  Such  loans  are  available  in  all  these 
centers,  but  in  some  they  are  more  abundant  and  better  fitted 
for  this  purpose  than  in  others.  In  New  York  those  most 
widely  used  are  loans  made  to  operators  on  the  stock  ex- 
change subject  to  call,  and  secured  by  stock  exchange 
collateral,  and  30,  60  or  90  day  loans  secured  in  the  same 
way.  In  the  European  centers  bankers  bills  and  high  class 
commercial  bills  are  more  widely  used. 


276  Money  and  Banking 

3.  Bank  and  market  rates. — The  rates  charged  on  these 
loans  and  in  discounting  bills  are  the  best  barometers  of 
money  market  conditions  and  serve  to  some  extent  as  regu- 
lators of  the  reserves.  On  the  European  markets  the  official 
rate  of  discount  of  the  central  banks  is  known  as  the  bank 
rate  and  the  rates  charged  by  other  institutions  for  standard 
loans  and  discounts  on  the  open  market  are  known  as 
market  rates.  On  account  of  the  absence  of  a  central  bank 
in  New  York  only  market  rates  are  quoted. 

In  fixing  these  rates  the  state  of  the  central  reserves  is 
the  most  important  single  factor.  In  New  York  the  con- 
nection between  the  two  is  so  close  that  the  chief  fluctua- 
tions of  the  rates  are  regularly  the  opposite  of  those  of  the 
reserves  of  the  Associated  Banks.  The  chart  on  p.  277* 
representing  average  conditions  during  the  period  1896- 
1906,  clearly  indicates  this. 

On  the  European  markets  the  connection  is  not  quite  so 
close,  but  it  is  none  the  less  real.  On  account  of  the  domi- 
nance there  of  central  banks  and  other  methods  of  control, 
rates  do  not  so  quickly  and  frequently  respond  to  changes 
in  the  reserves,  but  the  connection  between  the  two  is 
nevertheless  vital.  The  reason  for  this  connection  is  the 
same  in  all  cases.  It  is  the  effect  of  changes  in  rates  on  the 
movements  of  currency  and  on  the  volume  of  loans  and  dis- 
counts. Loan  funds,  like  ordinary  merchandise,  tend  to 
seek  the  best  markets.  Consequently,  when  rates  are  raised 
at  any  of  these  centers,  these  funds  are  attracted  thither, 
or  any  tendency  to  flow  away  is  checked.  On  the  other 
hand,  within  the  market  itself,  borrowers  will  be  deterred  by 
the  higher  rates,  the  volume  of  loans  diminished,  and  the 
percentage  of  reserves  to  deposits  increased.     Loan  and 

*  In  the  cases  of  the  rate  curves  an  upward  movement  means  a  rise 
and  a  downward  movement  a  fall,  while  in  those  of  the  reserve  curves 
the  opposite  is  true.     See  the  figures  at  the  left  of  the  chart. 


The  Money  Market 


277 


discount  rates  are  thus  regulated  in  accordance  with  the 
law  of  demand  and  supply  like  the  prices  of  commodities 


and  bank  reserves  at  the  money  market  centers  act  as  sup- 
ply barometers. 

In  each  market  are  various  classes  of  loans,  the  rates 
on  which  differ  in  accordance  with  the  length  of  the  period 
of  the  loan  and  the  character  of  the  security  on  which  it 
is  based.  In  New  York  the  market  rates  are  classified 
under  the  three  heads  call  loans,  time  loans  and  commercial 
paper.  The  call  loans  are  secured  by  stock  exchange  col- 
lateral and  are  subject  to  payment  on  twenty- four  hours' 


278 


Money  and  Banking 


notice;  time  loans  are  also  secured  by  stock  exchange  col- 
lateral and  include  30,  60  and  90  day,  4,  5,  6,  and  7  months' 
notes;  and  commercial  paper  is  based  on  personal  security 
consisting  of  a  single  or  of  two  names  and  designated  ac- 
cordingly as  single  and  double-name-paper.  Ordinarily 
the  rates  on  call  loans  are  the  lowest,  those  on  time  loans 
higher,  and  those  on  commercial  paper  highest. 

The  following  diagram  represents  normal  conditions  in 
the  period  1896- 1906. 


00 
— a^ 

.0 
ON 

— R- 

— 9 

— 0 

? 

^ 

-    -lO 

— 9 

— 9-<%- 

3^ 

CO 

1— 1 

— CO 

CO 

.-1 

— I— 1 

0^ 

rH 

0^ 

i-H 

— .— t 

On 

1-\ 

On 

r-\ 

lU— 

/ 

(' 

t 

/L 

Un 

0 

f 

t     i 

,    A 

> 

^ 

—k 

L^ 

\- — 

AA-r^ 

-^ 

p\ 

i 
1 

\ 

^ — 

^ 

^ 

rV 

/ 

f  Jf 

0  - 

-4- 

^ 



m 

H 

^ 

-^ 

v\ 

— r 

-4- 

-3- 

^ 

-^ 

*i^ 

— \ 

— \ 

,^ 

\\ 

rj^ 

-3- 

— \* 

<^— 

1 

— \— 

-1- — 1 

— \ 

r 

7 — 



0 

£. 

' 

f^ 

\ 

i 

1 

A=: Commercial  paper,  60  day 

B=6o  day  time 

C=Cail  loans  at  stock  exchange 

Within  the  time  loan  and  commercial  paper  groups,  the 
longer  the  period  of  the  loan,  the  higher  the  rate.  The  ex- 
planation of  these  differences  is  the  importance  from  the 
banker's  standpoint  of  control  over  his  resources.  The  call 
loan  enables  him  to  meet  the  demands  of  depositors  and  to 
take  advantage  of  more  favorable  market  conditions  upon 
very  short  notice.     The  longer  the  period  of  the  loan,  the 


The  Money  Market  279 

more  difficult  it  is  for  him  to  meet  unforeseeable  conditions 
and  he  accordingly  demands  remuneration  for  this  disad- 
vantage in  the  form  of  higher  rates.  The  explanation  of 
the  higher  rates  on  commercial  paper  is  the  inferior  charac- 
ter of  the  security  back  of  it.  This  consists  of  the  solvency 
of  the  persons  whose  name  or  names  are  signed  to  the 
paper,  while,  in  the  case  of  the  other  two  classes  of  loans, 
the  bank  has  in  its  possession  first-class  bonds  or  stocks 
listed  on  the  stock  exchange  which  can  be  sold  on  very  short 
notice,  if  the  loan  is  not  paid  at  maturity.  If  a  commercial 
paper  loan  is  not  paid  at  maturity,  legal  proceedings  are  nec- 
essary in  order  to  obtain  the  right  to  sell  the  property  of  the 
person  or  persons  whose  names  are  signed  to  it,  and  there 
may  be  uncertainty  concerning  the  existence  of  such  prop- 
erty or  its  adequacy  to  pay  the  debt. 

On  the  London  and  Continental  markets  the  classification 
of  rate-quotations  is  not  the  same  as  in  New  York.  In 
London,  besides  the  bank  rate,  are  regularly  quoted  the 
rates  on  so-called  floating  money,  on  three,  four  and  six 
months  hank  bills  and  on  three,  four  and  six  months  trade 
bills.  Fortnightly  loans  are  also  quoted.  Floating  money 
includes  loans  made  subject  to  call  secured  by  first-class 
collateral,  usually  bills  of  exchange;  bank  bills  are  drawn 
on  banking  and  trade  bills  on  commercial  houses  of  high 
standing.  Fortnightly  loans  are  made  to  operators  on  the 
stock  exchange  on  the  security  of  bonds  and  stocks  there 
listed  for  the  purpose  of  enabling  them  to  tide  over  the 
period  between  the  settling  dates  on  the  exchange  which  oc- 
cur at  the  middle  and  end  of  each  month.  The  differences 
between  the  rates  charged  on  these  classes  of  loans  are  not 
so  great  as  in  New  York,  but  the  same  principles  are  il- 
lustrated, the  elements  of  time  and  of  security  operating 
there  in  the  same  manner  as  in  New  York.  In  each  group, 
for  example,  the  longer  the  period  of  the  loan,  the  higher 


28o  Money  and  Banking 

the  rate  tends  to  be.  The  element  of  security  shows  itself  in 
the  tendency  of  the  rates  on  bank  bills  to  be  lower  than 
those  on  trade  bills.  The  rate  on  fortnightly  loans  is  us- 
ually above  the  other  rates  and  in  this  respect  seems  to  be 
an  exception  to  the  principle  illustrated  by  the  only  loans 
analogous  to  it  on  the  New  York  market,  namely  call  loans 
on  the  stock  exchange.  The  element  of  time,  however, 
constitutes  an  important  difference  between  these  two  classes 
of  loans,  and  the  bank  and  trade  bills  with  which  they  are 
compared  rank  as  higher  classes  of  securities  in  London 
than  do  time  loans  and  commercial  paper  in  New  York. 
All  things  considered,  the  fortnightly  loan  is  not  regarded 
in  London  as  so  good  an  investment  from  the  banker's  stand- 
point as  bank  or  trade  bills  or  floating  money. 

As  we  have  seen,  the  bank  rate  has  no  analogy  in  New 
York.  It  is  usually  the  highest  rate  on  the  market,  though 
at  times  it  falls  below  some  or  all  of  the  others.  As  a 
barometer  of  market  conditions,  however,  it  is  more  signifi- 
cant than  any  of  the  others.  In  London  it  is  fixed  by  the 
directors  of  the  Bank  of  England  at  their  weekly  meetings 
and  is  used  primarily  as  a  regulator  of  the  reserves,  being 
raised  when  it  is  considered  desirable  to  increase  the  Bank's 
holdings  of  cash,  or  to  check  a  tendency  to  fall,  and  lowered 
under  opposite  conditions.  Its  influence  over  the  reserves  is 
due  largely  to  the  custom  almost  universal  in  England  of 
paying  interest  on  depositors'  balances  at  the  rate  of  one  and 
one-half  per  cent,  below  the  Bank  rate,  provided  that  does 
not  advance  beyond  four  per  cent.  Since  market  rates  on 
loans  tend  to  vary  with  the  rate  paid  on  deposits,  the  Bank 
rate  affects  all  the  others,  and  its  rise  tends  to  attract  funds 
or  to  check  their  outward  flow,  and  its  fall  to  stimulate  a 
movement  in  the  opposite  direction.  The  fact  that  it  is 
usually  above  the  other  rates  is  due  to  the  ultimate  depend- 
ance  of  the  other  banks  upon  the  Bank  of  England  for  cash. 


The  Money  Market  281 

and  to  the  great  prestige  of  that  institution.  In  order  to 
supply  their  needs,  other  financial  institutions  directly  or 
indirectly  must  borrow  from  the  Bank,  and  this  puts  her 
in  a  position  to  charge  slightly  higher  rates  than  those 
ruling  on  the  market.  The  rates  of  the  Bank  of  France 
and  of  the  Imperial  Bank  of  Germany  are  regulated  in 
accordance  with  the  same  general  principles  as  that  of  the 
Bank  of  England.  In  the  details  of  their  precedure  these 
banks  differ  from  each  other  on  account  of  the  peculiarities 
of  their  respective  markets. 

4.  Bank  notes  and  the  money  market. — On  account  of  the 
varying  demands  of  commerce  caused  by  changing  seasons, 
the  periodicity  of  dividend,  interest  and  other  payments,  ups 
and  downs  of  business  prosperity,  commercial  crises,  etc., 
each  market  is  called  upon  to  supply  larger  amounts  of 
hand-to-hand  money  at  some  times  than  at  others.  In 
order  to  be  in  a  position  to  do  this,  either  the  reserves  at 
the  slack  seasons  must  be  greatly  in  excess  of  what  is 
needed,  or  the  banks  must  be  able  to  create  hand-to-hand 
money  to  meet  the  extra  requirements.  The  plan  of  keeping 
large  reserves  during  the  slack  seasons  is  impracticable  be- 
cause it  involves  loss  to  the  banks.  At  such  times  they  are 
certain  to  tempt  borrowers  by  lowering  the  rates,  and  this 
stimulates  speculation  and  other  unsound  business  ventures. 
When  the  period  of  excess  demand  comes,  on  the  other 
hand,  they  are  apt  to  burden  legitimate  business  with  ex- 
cessive rates  and  sometimes  with  an  actual  shortage  of 
funds,  as  the  alternative  of  overstraining  their  credit. 

These  excesses  wnth  their  unfortunate,  and  sometimes  dis- 
astrous consequences,  can  only  be  avoided  by  giving  to  the 
central  reserve  holding  banks  the  right  to  issue  notes  against 
commercial  assets.  Such  notes  will  supply  most  of  the 
needs  for  hand-to-hand  money  as  well  as  coin,  and  the  per- 
mission to  issue  them  against  commercial  assets  puts  them 


282  Money  and  Banking 

within  the  reach  of  every  commercial  bank  conducting  a 
legitimate  business.  Those  located  outside  the  central 
market  can  rediscount  such  securities  there  and  those  within 
can  issue  the  notes  directly  to  the  original  makers  of  the 
paper,  or  to  the  brokers  who  act  as  intermediaries  in  its  sale. 
When  the  season  of  excess  demand  passes,  the  surplus  of 
discounted  paper  will  be  paid,  thus  reducing  the  total  vol- 
ume, the  surplus  notes  will  accumulate  in  the  banks  in  the 
form  of  deposits  and  will  ultimately  find  their  way  to  the 
issuers  for  retirement. 

Indeed  to  supply  the  elastic  element  of  the  hand-to-hand 
money  of  a  country  is  the  chief  function  of  bank-note 
issues.  Coin  and  government  notes  are  inelastic  because  the 
sources  of  their  supply  are  not  responsive  to  the  varying 
needs  of  commerce.  The  production  of  the  precious  metals, 
the  chief  source  of  the  supply  of  coin,  depends  upon  dis- 
covery, cost  of  production  and  demand  in  the  arts,  which 
have  no  connection  with  currency  needs,  and  all  fonns  of 
government  notes,  except  those  completely  covered  by  coin 
and  consequently  in  the  changes  in  their  volume  subject  to 
the  same  laws  as  coin,  increase  and  decrease  in  response 
to  the  needs  of  governments,  or  to  the  will  of  legislative 
bodies  or  executive  officials. 

It  is  worthy  of  note  in  this  connection  that  bank-notes 
best  perform  their  functions  at  the  money  market  centers. 
It  is  here  that  the  pressure  for  the  supply  of  the  varying 
needs  of  commerce  is  felt,  being  transmitted  thither  from 
all  other  points,  and  being  impossible  to  shift  to  other 
places.  For  this  reason  the  concentration  of  such  issues  in 
one  or  in  a  few  institutions  located  at  the  central  money 
market  is  desirable,  a  practice  common  in  Europe  but  yet  to 
be  adopted  in  the  United  States. 

5.  Peculiarities  of  the  New  York  market. — Differences  be- 
tween the  monetary,  banking  and  credit  systems,  and  be- 


The  Money  Market  283 

tween  the  commercial  practices  of  the  different  countries, 
are  responsible  for  certain  peculiar  features  of  their  central 
money  markets.  Those  of  New  York  are  due  to  the  lack  in 
this  country  of  an  elastic  system  of  bank-note  issues,  and  of 
a  central  bank,  to  our  independent  treasury  system,  and  to 
the  circulation  of  a  large  amount  of  overvalued  silver  and 
various  kinds  of  government  notes. 

As  previously  stated,  bank-notQ3  are  issued  in  this  country 
only  against  the  deposit  of  government  bonds  and  their 
volume  consequently  varies  with  the  price  of  these  securities 
and  with  the  circumstances  which  make  it  desirable  or  un- 
desirable for  national  banks  to  come  into  existence.  They 
do  not,  therefore,  play  the  role  of  an  elastic  element  in 
our  hand-to-hand  currency,  but  rather  that  of  an  erratic 
variable,  causing  it  to  increase  and  decrease  without  refer- 
ence to  commercial  needs  and  frequently  at  variance  with 
them. 

The  effect  of  our  independent  treasury  system  is  much 
the  same.  The  balance  between  the  receipts  and  expendi- 
tures of  the  government,  the  chief  cause  of  the  augmenta- 
tion or  depletion  of  money  holdings  by  the  Treasury  De- 
partment, depends  upon  the  productiveness  of  taxes  and 
other  sources  of  revenue  in  comparison  with  the  appropria- 
tions made  by  Congress  and  the  expenditures  resulting  there- 
from. This  balance  varies  from  one  budgetary  period  to 
another,  there  being  sometimes  a  surplus  and  sometimes  a 
deficit,  and  from  day  to  day,  and  month  to  month,  there  is 
no  predicting  what  it  will  be.  Unless  the  Secretary  of  the 
Treasury  intervenes  and  exercises  his  authority  to  deposit 
funds  with  the  banks,  during  the  surplus-accumulating 
periods,  money  may  accumulate  in  large  quantities  in  the 
New  York  Sub-Treasury,  thus  depleting  the  market  supply, 
and,  w^hen  these  accumulations  are  being  reduced,  the 
market  may  be  surfeited  with  funds.     Even  when  the  Sec- 


284 


Money  and  Banking 


retary  of  the  Treasury  sees  fit  to  intervene,  his  power  is 
Hmited  by  the  wilHngness  and  abihty  of  the  banks  to  supply 
the  security  required.  Even  then  the  exercise  of  his  dis- 
cretion introduces  an  element  of  uncertainty  which  renders 
unavoidable  the  erratic  character  of  the  influence  of  which 
we  are  speaking. 

The  result  of  this  lack  of  an  elastic  element  in  our  cur- 
rency and  of  the  influences  causing  erratic  variations  in  the 
amount  of  hand-to-hand  money  in  circulation  is  wide  fluc- 
tuations in  the  reserves  of  the  Associated  Banks  and  in 
money  rates.  The  chart  on  page  278  indicates  the  extent 
of  these  fluctuations  in  recent  years  in  terms  of  annual 
averages,  and  that  on  page  277  indicates  average  con- 
ditions for  each  year. 

The  actual  fluctuations  are  much  greater  than  these 
charts,  based  on  averages,  in'dicate.  The  following  table  re- 
presenting the  maximum  and  minimum  of  the  typical  rates 
in  recent  years,  better  reveals  their  magnitude : 


Date 

Call  Loans  at  Stock 
Exchange 

60  Days  Time 

60  Days  Double  Name 
Commercial  Paper 

Minimum 

Maximum 

Minimum 

Maximum 

Minimum 

Maximum 

1900 

I 

25 

2\ 

6 

3h 

sh 

1901 

I 

75 

3 

6 

3 

5 

igo2 

2 

35 

ih 

6 

4 

6 

1903 

I 

15 

3i 

6 

4i 

6 

1904 

i 

6 

li 

Ah 

ih 

5i 

1905 

li 

125 

2i 

8 

3i 

6 

1906 

li 

60 

3i 

10 

4i 

7 

1907 

I 

125 

3 

16 

5 

8 

1908 

1 

20 

If 

10 

3 

8 

1909 

I 

7 

2 

S\ 

3 

Sh 

On  account  of  the  absence  of  a  central  bank,  there  is 
wanting  in  New  York  the  steadying  and  unifying  influence 


The  Money  Market  285 

of  a  bank  rate  and  the  bulwark  to  confidence  which  the 
great  European  banks  form.  The  banks  associated  in  the 
Clearing-House  act  as  a  unit  and  in  harmony  on  many  mat- 
ters of  great  importance,  but  they  cannot  approximate  the 
unity  and  quickness  of  action  of  a  single  institution.  In 
rate  making,  loaning  and  discounting,  and  in  the  manipula- 
tion of  their  reserves  within  legal  limits,  they  act  in- 
dependently, except  on  rare  occasions  in  times  of  crises, 
when  the  Clearing-House  Association  decides  upon  ex- 
traordinary measures.  The  most  they  can  then  do  is  tem- 
porarily to  combine  their  reserves  through  the  issue  of  clear- 
ing-house certificates.*  They  do  not  and  cannot  bear  the 
responsibility  directly  or  indirectly  assumed  by  the  central 
banks  of  Europe  to  supply  the  market  with  funds  against 
the  rediscount  of  first-class  bills. 

The  interests  of  the  public  as  opposed  to  those  of  in- 
dividuals or  groups  of  individuals  lack  adequate  representa- 
tion on  the  New  York  market.  In  the  European  markets 
these  interests  are  cared  for  by  the  government  through  its 
direct  or  indirect  control  of  the  central  bank.  Their  sole 
representative  in  New  York  is  the  Secretary  of  the  Treas- 
ury, whose  power,  as  w-e  have  seen,  is  quite  limited.  The 
result  is  that  the  New  York  market  is  subject  to  manipula- 
tion for  the  benefit  of  special  interests  and  at  the  expense  of 
the  public. 

The  circulation  of  the  government  notes,  familiarly 
known  as  greenbacks,  is  a  feature  of  our  money  market 
worthy  of  note.  These  notes,  amounting  to  $346,681,016 
redeemable  on  demand  in  gold  by  the  United  States  Treas- 

*These  are  certificates  issued  against  specified  securities  deposited 
with  the  Clearing-House  Association  and  receivable  for  clearing-house 
balances.  They  usually  bear  a  high  rate  of  interest  and  are  some- 
times issued  in  denominations  small  enough  to  make  them  available 
for  general  circulation. 


286  Money  and  Banking 

ury  and  legal  tender  for  the  payment  of  all  debts  public 
and  private,  except  duties  on  imports  and  interest  on  the 
public  debt,  constitute  a  fixed  element  in  our  currency  and 
are  available  for  use  as  bank  reserves.  By  their  presenta- 
tion for  redemption  it  is  possible  at  times  for  the  banks 
to  throw  upon  the  Treasury  the  burden  of  supplying  the 
market  with  gold.  The  ability  of  the  Treasury  to  meet 
this  obligation  depends  upon  a  reserve  of  $150,000,000  in 
gold  kept  for  that  purpose  and,  in  case  of  its  depletion,  upon 
the  right  to  borrow  gold  by  the  issue  of  bonds. 

A  similiar  obligation  is  imposed  on  the  government  by  the 
circulation  of  more  than  five  hundred  million  silver  dollars 
or  silver  certificates  representing  them.  The  bullion  value 
of  these  coins  varies  with  the  price  of  silver,  but  for  many 
years  it  has  been  less  than  one-half  their  face  value.  The 
responsibility  for  making  good  this  difference  is  imposed 
upon  the  Treasury  by  the  legal  requirement  that  it  must 
at  all  times  maintain  the  circulation  value  of  these  coins 
at  a  parity  with  gold.  For  the  meeting  of  this  obligation  no 
gold  reserve  is  maintained  nor  has  the  right  to  issue  gold 
bonds  for  this  purpose  been  granted  by  Congress.  The 
Treasury  is  protected  only  indirectly  and  very  imperfectly 
by  legal  provisions  requiring  the  retirement  of  greenbacks 
and  national  bank-notes  of  low  denominations,  and  the 
issue  of  the  bulk  of  the  silver  certificates  in  these  denomina- 
tions. By  this  means  it  is  hoped  that  the  silver  currency 
may  be  kept  constantly  in  use  and  its  return  to  the  govern- 
ment prevented. 

The  peculiar  feature  of  our  money  market,  due  to  the 
circulation  of  these  greenbacks  and  silver  dollars,  is  the 
placing  of  the  responsibility  for  the  maintenance  of  gold 
payments  upon  the  Treasury  without  equipping  it  with  the 
means  of  meeting  this  responsibility  under  all  possible 
conditions.     The  gold   reserve  of  $150,000,000  once  ex- 


The  Money  Market  287 

hausted,  the  only  resort  of  the  Treasury  is  the  borrowing  of 
gold  by  means  of  bond  issues.  In  times  of  monetary 
stringency  and  sharp  international  competition  for  gold, 
precisely  the  times  on  which  such  a  situation  would  have  to 
be  faced,  such  a  proceeding  would  at  the  best  be  slow 
and  expensive  and  might  be  impossible.  Knowledge  of  the 
weakness  and  unprotected  character  of  the  Treasury  under 
such  conditions  contribute  toward  a  panicky  feeling  on  the 
money  market  whenever  these  conditions  are  feared  or  ap- 
proximated, and  thus  helps  to  create  the  kind  of  a  situation 
which  it  should  be  the  chief  function  of  the  guardian  of  the 
public  interests  on  the  money  market  to  prevent. 

6.  Some  peculiarities  of  the  London  market. — The  Lon- 
don market  owes  its  chief  peculiarities  to  the  central  position 
which  England  occupies  in  international  commerce,  to  cer- 
tain features  of  her  banking  system,  and  to  the  magnitude 
of  English  investments  in  foreign  securities. 

For  more  than  a  century  London  has  served  as  a  clearing 
house  for  international  commerce.  Through  the  colonial 
system  of  England,  her  free  trade  policy,  her  early  estab- 
lishment of,  and  persistent  adherence  to,  the  gold  standard 
of  value,  her  great  wealth,  and  the  genius  of  her  people  for 
commerce,  London  merchants  have  established  trade  con- 
nections with  every  part  of  the  world  and  are  able  to  per- 
form the  function  of  an  intermediary  for  foreign  mer- 
chants in  other  parts  of  the  world  more  economically  than 
those  of  any  other  country.  The  volume  of  this  kind  of 
business  performed  by  them  has  long  been  enormous  and 
shows  no  tendency  to  diminish  in  spite  of  the  increasing 
competition  of  other  centers.  One  result  of  this  commercial 
eminence  has  been  to  make  London  the  chief  market  in  the 
world  for  foreign  bills  of  exchange,  and  control  of  this 
market  has  given  her  a  command  of  the  monetary,  particu- 
larly of  the  gold,  resources  of  the  world  possessed  by  no 


288  Money  and  Banking 

other  city  and  at  the  same  time  has  subjected  her  to  drafts 
from  every  quarter.  She  has  thus  become  the  central  money 
market  of  the  world. 

In  the  performance  of  this  function  the  manipulation  of 
the  rate  of  discount  of  the  Bank  of  England  plays  the 
leading  role.  On  account  of  their  ready  saleability  and 
their  high  character  in  other  respects,  the  bankers  of  the 
chief  continental  markets  fill  their  portfolios  with  London 
bills  whenever  local  paper  is  inadequate  for  the  profitable 
employment  of  their  funds,  a  common  condition  of  things, 
especially  in  France,  Belgium  and  Holland.  On  account 
of  its  influence  on  the  market  rate,  the  rate  of  the  Bank 
of  England,  however,  is  the  chief  determinant  of  the  profit- 
ableness of  these  investments.  Accordingly  when  that 
rate  rises,  London  paper  is  purchased  in  increased  quanti- 
ties, and  when  it  is  lowered,  it  is  sold  and  new  investments 
diminished  in  magnitude.  In  the  one  case  the  power  of 
London  to  draw  gold  from  the  continental  centers  is  in- 
creased, a  balance  in  her  favor  being  created  or  an  adverse 
balance  diminished  or  annihilated,  and  in  the  other  the 
power  of  these  centers  to  draw  on  London  is  enhanced. 
The  gold  supply  of  the  London  market  is  thus  more  elastic 
than  that  of  any  other. 

This  fact  renders  less  serious  the  consequences  of  the 
inelasticity  of  the  English  system  of  bank-note  issues.  As 
was  pointed  out  in  a  preceding  chapter,  with  the  exception 
of  a  small  amount  of  notes  issued  by  a  few  joint-stock  and 
private  banks,  the  magnitude  of  which  cannot  be  increased 
and  which  diminishes  very  slowly,  the  Bank  of  England 
issues  all  the  notes  in  circulation  under  the  limitations  im- 
posed by  the  bank  act  of  1844  and  subsequent  orders  in 
council  issued  in  accordance  with  its  provisions.  As  a 
result  of  these  limitations  the  volume  of  bank-notes  in  cir- 
culation  normally   increases   only   when   a   corresponding 


The  Money  Market  289 

amount  of  gold  coin  is  paid  into  die  issue  department  of  the 
Bank  and  decreases  only  when  a  corresponding  amount  of 
gold  coin  is  paid  out.  The  total  volume  of  the  circulating 
medium,  therefore,  is  not  affected  by  them  in  any  way,  and 
the  only  elasticity  in  this  country's  hand-to-hand  money  is 
due  to  the  gold  element. 

In  the  determination  of  London's  command  over  the  gold 
supply  of  the  world,  an  important  factor  is  the  magnitude  of 
the  investments  of  Englishmen  in  foreign  securities,  and 
the  international  character  of  the  London  stock  exchange. 
For  many  years  the  savings  of  the  English  people  have  been 
in  excess  of  the  amount  that  local  enterprises  could  profit- 
ably absorb,  and  they  have  consequently  sought  and  found 
employment  in  the  colonies  and  in  other  countries,  chiefly 
in  the  form  of  investments  in  high-class  securities,  such  as 
government,  municipal  and  corporation  bonds,  and  the  stock 
of  railroad,  mining  and  other  large  industrial  corporations. 
The  amount  of  such  securities  at  all  times  in  the  country 
and  especially  in  the  vaults  of  London  financial  houses  is 
very  great,  and,  whenever  the  need  for  funds  is  pressing, 
a  part  of  them  may  be  sold  and  the  balance  of  indebtedness 
thus  influenced  in  favor  of  England. 

The  London  stock  exchange  renders  the  sale  of  these 
securities  easy  and  rapid.  It  lists  and  supplies  facilities 
for  dealing  in  them  as  other  markets  do  in  national  and 
other  local  securities.  It  is  connected  by  telegraph  with 
the  other  important  stock  exchanges  of  the  world,  and  its 
brokers  transact  business  for  people  in  other  countries  as 
well  as  for  Englishmen.  It  is,  in  fact,  an  international 
market  and  contributes  in  no  small  degree  to  the  inter- 
national importance  of  the  other  financial  institutions  of  the 

city. 

7.  Some  peculiarities  of  the  Paris  market. — In  France  the 
issues  of  the  Bank  of  France  perform  the  function  which 


290  Money  and  Banking 

properly  belongs  to  bank-notes,  that  is  their  volume  responds 
automatically  to  the  varying  needs  of  the  country  for  hand- 
to-hand  money.  The  other  financial  institutions  of  the 
country,  notably  the  great  banks  of  discount,  supply  their 
needs  for  cash  by  drawing  upon  balances  regularly  kept  with 
the  Bank  of  France,  and  by  rediscounting  bills  which  come 
into  their  possession  in  the  ordinary  course  of  their  opera- 
tions. An  increased  demand  for  cash  anyv^here  in  the 
country  thus  normally  takes  the  form  of  the  presentation  to 
local  banks  by  merchants  and  manufacturers  of  their  bills 
for  discount  and  of  their  transfer  through  rediscounts  to 
the  portfolios  of  the  Bank  of  France,  which  may  meet  the 
demands  made  upon  it  by  the  issue  of  notes.  The  payment 
of  these  bills,  without  the  discount  of  a  corresponding 
amount  of  new  ones,  brings  the  notes  back  to  the  Bank  for 
retirement. 

The  operation  of  the  system  is  illustrated  by  the  diagram 
on  p.  291,  which  indicates  a  general  correspondence  be- 
tween the  circulation  and  discount  curves  of  the  bank.  It 
should  also  be  noted  that  the  fluctuations  in  the  volume 
of  the  note-issues  correspond  with  variations  in  the  sea- 
sonal demands  for  currency. 

On  account  of  the  elasticity  of  her  note-issues,  the  re- 
serves of  the  Bank  of  France,  which  constitute  the  central 
coin  reserve  of  the  country,  are  less  directly  connected  with 
the  seasonal  and  other  temporary  variations  in  the  currency 
needs  of  the  country  than  are  those  of  the  Bank  of  Eng- 
land or  of  the  Associated  Banks  of  New  York. 

In  the  protection  of  her  gold  reserves  the  Bank  of  France 
is  aided,  temporarily  at  least,  by  the  legal-tender  laws  of 
the  country  which  enable  it  at  discretion  to  meet  cash 
obligations  with  silver  five-franc  pieces,  the  bullion  value  of 
which  is  much  below  their  circulation  value,  as  well  as 
with  gold  coin.     These  silver  coins  are  no  longer  minted, 


The  Money  Market 


291 


but  a  large  quantity  of  them  are  in  circulation  and  in  the 
vaults  of  the  Bank,  and,  whenever  it  is  desired  to  check  an 

CIRCULATION    AND    DISCOUNT    CURVES,    BANK    OF    FRANCE 


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outward  movement  of  gold,  the  Bank  may  use  them  instead 
of  gold  in  the  redemption  of  notes,  the  payment  of  deposi- 
tors, etc.  It  is  claimed  by  some  that  the  protection  thus 
gained  is  only  temporary,  since  gold  to  meet  foreign  obli- 
gations must  ordinarily  be  found  and  as  the  holder  of  the 
ultimate  reserves  of  the  countrv,  the  Bank  must  furnish  it. 
The  only  effect  of  the  temporary  use  of  five- franc  pieces  in 
meeting  the  Bank's  obligations,  it  is  claimed,  is  to  force  a 
premium  on  gold  sufficient  to  draw  tie  supply  needed  from 
the  general  circulation  of  the  country,  the  deficiency  thus 
created  being  ultimately  supplied  by  the  Bank. 

Another  peculiarity  of  the  Paris  market,  in  part  a  result 


292  Money  and  Banking 

of  those  just  described,  is  the  relative  stabiHty  of  rates. 
The  discount  rate  of  the  Bank  of  France  changes  much  less 
frequently  than  that  of  the  Bank  of  England.     According 
to  the  calculations  of   Mr.   Inglis   Palgrave  *   during  the 
period  1844  to  1900  it  changed  iii  times,  while  that  of  the 
Bank  of  England  changed  400  times.     In  recent  years  the 
discrepancy  is  still  greater,  in  the  decade  1890  to  1900,  for 
example,  the  number  of  changes  for  each  bank  respectively 
was  9  and  66  and  for  the  period  1901  to  1908,  8  and  48.** 
8.  Some  peculiarities  of  the  Berlin  market. — The  Berlin 
market  resembles  that  of  Paris  in  some  respects  and  that  of 
London  in  others.     The  notes  of  the  Imperial  Bank,  like 
those  of  the  Bank  of  France,  are  issued  in  response  to  com- 
mercial needs  against  first-class  bills  of  exchange,  and  fluc- 
tuate in  volume  in  accordance  with  variations  in  those  needs. 
Instead  of  a  maximum  fixed  by  law,  which  the  total  volume 
of  issues  may  not  exceed,  the  Imperial  Bank  pays  a  tax  of 
five  per  cent,  on  all  issues  in  excess  of  a  fixed  quota  which  is 
so  low  that  the  occasions  on  which  it  is  desirable  to  exceed 
it  are  frequent.***  One  consequence  of  this  is  that  rates  on 
the  Berlin  market  may  be  forced  to  a  relatively  high  point 
before  the  Bank  can  without  loss  afford  relief.     On  ac- 
count of  the  dominance  of  the  public  interest  in  its  manage- 
ment, however,  it  not  infrequently  issues  notes  at  a  loss, 
refusing  to  advance  the  discount  rate  to  a  sufficiently  high 
point  to  cover  the  tax  and  the  other  expenses  of  issue. 
Thus  non-commercial   influences  are  made   to  affect   the 
market. 

Like  the  Bank  of  England,  the  Imperial  Bank  of  Ger- 

*  Bank  Rate  and  the  Money  Market,  p.  157. 

♦♦Calculated  from  returns  published  in  the  Bankers'  Magazine. 

***As  noted  in  chapter  xvi  a  law  passed  June  i,  1909,  provided  for 
a  considerable  increase  in  the  tax-free  quota  beginning  with  Jan.  i, 
1911. 


The  Money  Market  293 

many  is  required  by  law  to  redeem  its  notes  on  demand 
in  gold.  The  Bank  of  France,  as  we  have  seen,  has  the 
alternative  of  redeeming  its  notes  in  silver  five-franc  pieces. 
In  theory,  therefore,  Berlin  like  London  is  a  free  and  open 
market  for  gold.  In  practice  it  is  claimed  that  the  Imperial 
Bank  has  at  times  exerted  pressure  of  a  non-commercial 
kind  to  prevent  the  exportation  of  gold.*  If  this  be  true, 
some  justification  for  such  action  may,  perhaps,  be  found  in 
the  fact  that  her  facilities  for  influencing  international 
movements  of  the  yellow  metal  are  not  equal  to  those  of  the 
great  English  bank.  Berlin  is  not  to  the  same  extent  as 
London  a  clearing-house  for  international  commerce,  nor 
are  Berlin  bills  so  popular  investments  among  continental 
banks  as  London  bills.  In  consequence  her  bank  rate  is 
not  so  influential  in  international  commerce  as  the  English. 
The  ability  of  the  Imperial  Bank  to  issue  notes  against 
commercial  paper,  however,  is  a  means  of  protecting  her 
gold  reserve  not  possessed  by  the  Bank  of  England,  since 
these  notes  may  be  used  to  satisfy  a  national  demand  for 
currency  in  cases  in  which  gold  would  have  to  be  used  in 
England. 

Another  peculiarity  of  the  Berlin  market  is  the  result  of 
the  power  of  the  great  private  banks  and  of  their  direct 
participation  in  Various  branches  of  domestic  and  foreign 
industry.  They  do  so  large  a  portion  of  the  banking  busi- 
ness of  the  country  that  they  are  able  at  times  to  threaten 
the  control  of  the  Imperial  Bank,  when  their  interests 
lie  in  that  direction,  a  condition  of  affairs  not  un- 
likely to  arise  owing  to  their  direct  participation  in  indus- 

*  Some  doubt  is  thrown  on  this  claim  by  the  interviews  held  by 
our  National  Monetary  Commission  with  representatives  of  the  Im- 
perial Bank.  See  "Interviews  on  the  Banking  and  Currency  Sys- 
tems of  England,  Scotland,  France,  Germany,  Switzerland  and  Italy," 
P-  358. 


294  Money  and  Banking 

try  and  in  the  stock  market.  Involved  as  they  are  in  various 
industrial  enterprises  \\hich  they  have  promoted,  or  which 
they  are  fostering,  their  interests  may  lie  in  the  direction  of 
expansion,  or  in  that  of  gold  exportation  when  those  of  the 
country  as  a  whole,  as  interpreted  by  the  Imperial  Bank, 
lie  in  the  opposite  direction.  In  such  a  case  the  Imperial 
Bank  may  find  control  of  the  market  through  manipulation 
of  the  discount  rate  difificult  if  not  impossible. 

REFERENCES 

In  addition  to  the  references  on  the  workings  of  the  banking  ma- 
chinery of  the  different  countries  given  at  the  close  of  the  chapters 
immediately  preceding  consult  for  the  United  States:  Pratt,  The  Work 
of  Wall  Street;  Conant,  Wall  Street  and  The  Country;  Nelson, 
Editor,  The  A  B  C  of  Wall  Street;  for  England:  Straker,  The  Money 
Market;  Clare,  The  Money  Market  Primer  and  Key  to  the  Exchanges; 
Bagehot,  Lombard  Street;  Hankey,  The  Pri?iciples  of  Banking,  its 
Utility  and  Economy  with  remarks  on  the  Working  and  Management 
of  the  Bank  of  England;  Flux,  The  Bank  of  England  Reserve,  Jour. 
Can.  Banker's  Assn.  v.  xi.  p.  219;  Hillauer,  Die  Zahlungsvermittlung 
der  englischen  Banken  im  Uberseehandel;  and  Lecoffre,  Banques  An- 
glaises  et  Usages  de  Banque  en  Angleterre ;  for  France:  Sayous  Les 
Banques  de  Depot,  les  Banques  de  Credit  et  les  Societes  Financieres; 
Lepeltier,  Le  Portfeuille;  Tavernier,  Operations  de  Banque  et  de 
Bourse;  Rosendorff,  Die  Goldpr'dmien  politik  der  Banque  de  France 
und  ihre  deutschen  Lohredner,  Conrads  Jahrb.  3d  F.  v.  76.  p.  632;  and 
for  Germany:  Miscellaneous  articles  on  German  Banking  published  by 
the  National  Monetary  Commission ;  Obst,  Geld-,  Bank-,  und  Borsen- 
wesen;  Buchwald,  Technik  des  Bankbetriebes;  Kautsch,  Handbuch  des 
Bank-  und  Borsenwesens;  Weber,  Depositenbanken  und  Spekulations- 
banken;  and  Landmann,  System  der  Diskontpolitik. 

On  bank  rates  see  Palgrave,  Bank  Rate  and  the  Money  Market  in 
England,  France,  Germany,  Holland  and  Belgium  1844-1900;  Steel, 
On  Changes  in  the  Bank  Rate  in  Jour.  Inst,  of  Bankers,  1890-91 ; 
Giffen,  Gold  Supply,  the  Rate  of  Discount  and  Prices  and  Bank  Re- 
serves in  Essays  on  Finance,  2d  Series ;  Jevons,  Investigations  in  Cur- 
rency and  Finance,  ch.  v;  Prion,  Das  deutsche  Wechseldiskontgeschdft ; 
and  Scott,  Rates  on  the  New  York  Market  1896-1906,  Jour.  Pol.  Econ. 
for  May,  1908. 

The  financial  periodicals  of  each  country  publish  current  statistical 
information  such  as  bank  reports  and  statements,  money  and  exchange 


The  Money  Market  295 

rates,  stock  and  bond  quotations,  etc.,  and  many  valuable  articles  on  the 
workings  of  the  money  market  machinery.  Among  these  of  especial 
value  are  the  Commercial  and  Financial  Chronicle,  its  annual  sum- 
mary. The  Financial  Review,  Bradstreets,  The  Bankers'  Magazine, 
The  Wall  Street  Journal,  and  The  New  York  Journal  of  Commerce  for 
the  United  States ;  The  Economist  and  the  Bankers'  Magazine  for  Eng- 
land; L'Economiste  and  Le  Rentier  for  France;  and  Der  deutsche 
Oekonomist  and  the  monthly  V olkswirthschaftUche  Chronik  of  Conrad's 
Jahrbuch  for  Germany.  See  also  Raffalovich,  Le  Marche  Financier. 
The  following  public  documents  are  also  indispensible  for  the  study  of 
conditions  in  the  United  States :  Reports  of  the  Comptroller  of  the 
Currency;  Reports  of  the  banking  departments  of  the  States;  Statistical 
Abstract  of  the  United  States;  and  Monthly  Summary  of  Commerce 
and  Finance  of  the  United  States.  See  also  Special  Report  from  the 
Banks  of  the  United  States  published  by  the  National  Monetary  Com- 
mission. 


CHAPTER  XVI 
THEORY  OF  BIMETALLISM 

Until  comparatively  recent  times  there  waged  in  this 
and  some  other  countries  a  long  controversy  over  the  ques- 
tion of  bimetallism  vs.  monometallism.  Though  it  seems 
to  have  abated  temporarily  at  least,  its  importance  and  the 
nature  of  the  problems  involved  render  a  discussion  of  the 
subject  desirable  in  a  text  book  of  this  kind, 

I.  The  nature  and  purpose  of  bimetallism. — The  word 
bimetallism  is  used  to  describe  a  monetary  system  in  which 
standard  coins  of  both  gold  and  silver  are  freely  manufac- 
tured without  any  preference  whatever  being  §hown  by  the 
government  toward  either  metal.  It,  therefore,  involves 
three  things :  first,  that  the  public  authorities  should  decide 
upon  some  ratio  between  the  two  metals ;  second,  that  they 
should  agree  to  accept  all  the  gold  and  silver  bullion  of  the 
proper  standard  presented,  and  mint  it  into  certain  or  all 
classes  of  coins  at  the  ratio  selected;  and  third,  that  they 
should  make  such  coins  full  legal  tender  for  all  payments 
public  or  private.  This  system  is  advocated  as  a  substitute 
for  monometallism,  in  which  one  of  the  metals  only  is  used 
in  the  manufacture  of  standard  coins,  and  in  which  the 
other  occupies  a  subsidiary  position  in  the  sense  that  the 
coins  made  from  it  are  minted  only  on  government  account 
and  with  limited  legal-tender  power,  and  are  maintained  at 
at  par  with  the  standard  coins  by  being  made  redeemable 
directly  or  indirectly  in  them,  and  by  being  strictly  limited 
in  quantity  to  the  public  demand  for  them  in  those  uses  for 

296 


Theory  of  Bimetallism  297 

which  they  are  best  adapted.  In  order  to  avoid  confusion 
and  misunderstanding  several  points  should  be  carefully 
noted. 

First,  the  controversy  over  bimetallism  versus  mono- 
metallism does  not  involve  the  question  whether  both  gold 
and  silver  shall  be  used  for  monetary  purposes.  In  each 
system  coins  of  both  metals  play  an  important  part,  and  no 
monometallist  whose  opinion  is  worth  considering  pro- 
poses the  demonetization  of  either  silver  or  gold,  as  has 
often  been  charged.  The  question  simply  concerns  the 
best  method  of  fixing  the  relation  between  the  two  metals 
in  the  currency,  the  bimetallists  claiming  that  both  should  be 
put  upon  a  substantially  equal  footing  by  the  methods  of 
precedure  above  indicated,  while  their  opponents  claim  that 
coin  made  of  one  of  the  metals  should  be  made  subsidiary 
by  the  processes  described  in  Chapter  11.  The  difference 
between  the  two  parties  in  reference  to  this  matter  con- 
cerns the  use  of  both  metals  in  the  manufacture  of  standard 
coins  only. 

Second,  bimetallism  does  not  involve  the  necessity  of  es- 
tablishing an  office  for  money-changing  in  the  treasury 
department  at  which  the  government  would  freely  ex- 
change coins  of  the  one  metal  for  those  of  the  other.  It 
means  only  that  it  shall  agree  to  coin  all  the  silver  bullion 
of  the  proper  standard  which  people  are  pleased  to  bring  to 
the  mint  into  silver  coins  of  the  denominations,  weight,  and 
fineness  established  by  law,  and  all  the  gold  bullion  brought, 
into  gold  coins;  that  it  shall  receive  in  payments  coins  of 
either  or  both  kinds  without  discrimination,  and  pay  out 
whichever  variety  of  coins  it  pleases ;  and  that  it  shall  com- 
pel everybody  else  to  do  likewise  by  making  both  gold 
and  silver  coins  full  legal  tender.  Naturally  the  public 
treasurer  is  obliged  to  pay  out  the  kind  of  money  he  re- 
ceives, and  it  is  entirely  possible  that  under  a  bimetallic 


298  Money  and  Banking 

system  he  might  be  compelled  to  conduct  practically  all  his 
monetary  operations  in  one  of  the  metals,  and  thus  be  en- 
tirely unable  to  furnish  coins  of  the  other  metal  on  demand. 
Bimetallists  do  not  like  to  contemplate  such  a  state  of  af- 
fairs, and  do  not  believe  that  it  would  ever  be  realized,  but 
there  is  nothing  in  the  nature  of  their  system  to  prevent  it. 
Everything  depends  upon  the  mode  of  its  operation. 

Third,  so  far  as  the  present  practice  of  most  nations  is 
concerned,  the  proposition  of  the  bimetallists  is  that  some 
one  of  the  silver  coins,  usually  the  largest,  shall  be  freely 
minted  by  the  government  just  as  gold  coins  are  now,  and 
that  all  limitations  on  its  legal-tender  power  shall  be  re- 
moved. A  change  in  the  raito  sometimes  is  and  sometimes 
is  not  advocated.  In  the  United  States,  for  example,  the 
bimetallists  propose  that  the  silver  dollar,  which  weighs  six- 
teen times  as  much  as  would  a  gold  dollar,  if  one  were 
minted,  shall  be  freely  coined  for  all  persons  who  bring 
silver  bullion  nine-tenths  fine  to  any  of  our  mints  for  that 
purpose.  This  coin  already  possesses  full  legal-tender 
power,  and  consequently  no  change  in  this  particular  is 
needed.  With  us,  therefore,  the  question  of  bimetallism  re- 
duces itself  to  that  of  the  free  coinage  of  silver  dollars  as  op- 
posed to  their  present  limited  coinage  and  as  opposed  to  the 
proposition  made  by  many  people  that  they  be  completely  as- 
similated to  our  other  subsidiary  coins.  In  France  and  the 
other  countries  of  the  Latin  Union  the  controversy  con- 
cerns the  status  of  the  five-franc  piece,  the  coinage  of  which 
was  discontinued  in  1878.  The  bimetallists  propose  that 
this  coin,  the  weight  of  which  is  to  that  of  a  gold  coin 
of  the  same  nominal  value  as  15!/^  is  to  i,  shall  be  re- 
stored to  the  position  it  occupied  after  the  monetary  con- 
vention of  1865,  in  which  France,  Belgium,  Switzerland, 
and  Italy  agreed  to  coin  five-franc  pieces  as  freely  as  gold. 
Inasmuch  as  no  coin  similar  in  status  to  our  dollar  and  the 


Theory  of  Bimetallism  299 

five-franc  piece  of  the  Latin  Union  exists  in  England  and 
Germany,*  bimetallism  in  those  countries  would  mean  the 
selection  of  some  silver  coin,  possibly  the  crown  in  England 
and  the  five-mark  piece  in  Germany,  for  free  coinage, 
and  very  likely  a  change  in  the  weight  or  the  degree  of 
fineness  or  both,  of  the  coins  so  selected. 

The  purpose  of  the  advocates  of  bimetallism  is  to  render 
the  standards  of  the  nations  more  steady  in  value,  and  thus 
to  prevent  what  they  regard  as  unnecessarily  great  fluctua- 
tions in  prices  and  to  counteract  the  tendency  toward  ap- 
preciation which,  they  claim,  has  characterized  the  gold 
standards  of  the  world  during  the  last  thirty  years.  Some 
bimetallists,  especially  those  w^io  have  large  interests  in 
silver  mines,  have  special  reasons  of  a  personal  character 
for  their  enthusiasm  in  this  cause,  but  these  are  unworthy 
of  consideration  and  should  not  be  permitted  to  prejudice 
the  case  of  those  who  have  only  the  public  good  in  view.  In 
order  adequately  to  explain  the  motives  of  this  latter  class, 
it  is  necessary  to  describe  their  charges  against  the  mono- 
metallic system  and  their  theory  of  the  way  in  which  bimet- 
allism would  remove  or,  at  least,  mitigate  the  evils  for 
which  it  is  said  to  be  responsible. 

2.  The  bimetallists'  arraignment  of  the  monometallic 
system. — Monometallism  causes  unnecessarily  great  fluc- 
tuations in  prices  because  it  renders  the  currency  of  the 
gold-standard  nations  quite  independent  of  that  of  the 
silver-standard  countries  and  thus  prevents  a  mitigation 
or  neutralization  of  the  effects  of  changes  in  the  value  of 
the  precious  metals  through  mutual  readjustments  of  the 

*The  thalers  of  the  German  Empire  occupy  a  position  somewhat 
similar  to  our  dollars  and  the  French  five-franc  pieces,  but  they  can 
hardly  be  put  in  the  same  class  on  account  of  the  peculiarity  of  their 
origin  and  the  fact  that  in  theory  at  least  they  are  only  a  temporary 
element  of  the  currency  system. 


300  Money  and  Banking 

demand  for  them  for  monetary  purposes.  Prices  must 
change  in  the  gold-standard  countries  whenever  any  radical 
change  in  the  value  of  gold  takes  place,  and  the  same  result 
must  follow  in  silver-standard  countries  with  every  change 
in  the  value  of  silver.  The  result  is  that  prices  may  be  ri- 
sing in  the  gold  standard  countries  while  they  are  falling 
in  those  having  a  silver  standard  or  vice  versa,  and  very 
great  changes  may  be  taking  place  in  the  value  of  the 
standards  of  both  sets  of  countries  which,  they  claim, 
might  be  prevented  in  whole  or  in  part  by  bimetallism.  As 
a  case  in  point  they  call  attention  to  the  great  fluctuations 
in  prices  since  the  abandonment  of  bimetallism  in  this  coun- 
try and  Europe  in  the  early  and  middle  seventies.  They 
also  charge  monometallism  with  making  international  trade 
unduly  hazardous  on  account  of  the  impossibility  of  es- 
tablishing a  fixed  par  of  exchange  between  gold-  and  silver- 
standard  countries. 

3.  The  compensatory  action  of  the  double  standard. — As 
a  remedy  for  these  evils  the  bimetallists  rely  upon  what  has 
been  called  the  compensatory  action  of  the  double  standard. 
This  may  be  described  as  follows :  Suppose  that  the  ratio 
established  between  the  weights  of  gold  and  silver  coins 
of  the  same  nominal  value  be  16  to  i,  and  that  a  change  in 
the  market  for  bullion,  due  to  a  fall  in  the  value  of  silver, 
temporarily  makes  the  actual  ratio  18  to  i.  It  will  now  be 
profitable  for  all  debtors  to  pay  in  silver  and  sell  gold  coins 
as  bullion,  since  for  every  ounce  of  gold  thus  sold  they  can 
purchase  eighteen  ounces  of  silver,  and,  by  carrying  it  to  the 
mint  for  coinage,  pay  as  large  a  debt  or  make  as  large  a 
purchase  with  sixteen  ounces  as  they  could  have  done  with 
the  original  ounce  of  gold,  and  thus  make  a  clear  profit 
of  two  ounces  of  silver  on  every  such  transaction.  It  is 
not,  of  course,  to  be  supposed  that  every  person  would 
know  enough  to  take  advantage  of  such  a  situation,  or 


Theory  of  Bimetallism  301 

would  take  the  trouble  of  going  into  the  exchange  business 
if  he  did  see  this  chance  for  profit;  but  we  may  be  sure  that 
the  people  already  in  the  business,  namely,  the  bankers, 
would  melt  down  or  export  gold  coins  on  as  large  a  scale 
as  possible,  and  buy  silver  bullion  and  take  it  to  the  mint  for 
coinage.  One  result  of  this  procedure  would  be  a  large  in- 
crease in  the  coinage  of  silver  and  a  decrease,  perhaps  a 
complete  stoppage,  of  the  coinage  of  gold;  and  a  second 
would  be,  so  say  the  bimetallists,  a  large  increase  in  the  use 
of  silver  for  monetary  purposes,  and  a  decrease  in  the  use 
of  gold.  A  change  in  the  relative  demand  for  the  two 
metals  would  thus  be  produced  which  would  tend  to  coun- 
teract the  effects  of  the  fall  in  the  value  of  silver,  and  bring 
the  ratio  between  the  two  metals  on  the  bullion  market 
back  to  that  established  by  law  for  the  guidance  of  the 
mint.  That  is,  the  increase  in  the  use  of  the  one  metal  and 
the  decrease  in  the  use  of  the  other  for  monetary  purposes 
would  raise  the  value  of  the  first  and  lower  that  of  the 
second,  thus  tending  to  bring  the  two  ratios  together.  A 
further  argument  is  needed  to  show  that  this  compensatory 
action  would  be  sufficient  to  make  the  bullion  ratio  actually 
identically  with  the  legal,  and  this  the  bimetallists  find  in 
the  enormous  quantities  of  gold  and  silver  used  for  mone- 
tary purposes  and  in  the  relatively  small  capacity  of  the 
bullion  markets  to  absorb  increased  quantities  of  the  pre- 
cious metals  without  experiencing  great  fluctuations  in  their 
value. 

On  account  of  this  compensatory  action  of  the  double 
standard,  the  bimetallists  claim  that,  if  a  suf^cient  number 
of  nations  could  be  induced  to  adopt  the  bimetallic  system 
of  coinage,  no  variation  in  the  relative  value  of  the  precious 
metals  could  take  place.  The  general  level  of  prices  might 
rise  and  fall  on  account  of  changes  in  the  relative  value 
of  gold  and  silver  and  other  commodities,  but,  so  far  as 


302  Money  and  Banking 

their  relations  to  each  other  are  concerned,  no  change  could 
take  place,  since  any  tendency  in  that  direction  would  be 
immediately  counteracted  by  a  modification  in  the  relation 
between  the  demand  and  the  supply  of  the  two  metals 
brought  about  by  the  process  just  described.  The  above 
supposition  of  a  difference  between  the  legal  and  market 
ratios,  therefore,  must  be  regarded  as  a  hypothetical  case, 
useful  as  an  illustration  of  the  way  the  law  operates,  but  not 
in  correspondence  with  facts  as  they  would  present  them- 
selves under  the  bimetallic  system. 

The  relation  between  the  compensatory  law  and  the  al- 
leged evils  of  monometallism  are  obvious.  The  bimetallic 
system  acts  as  a  check  upon  fluctuations  in  the  value  of  both 
metals,  but  cannot  entirely  prevent  them.  As  soon  as  some 
external  force,  such  as  a  discovery  of  new  sources  of  supply, 
or  improvements  in  the  methods  of  production,  begins  to 
affect  the  value  of  one  of  the  metals,  the  action  of  the  com- 
pensatory law  commences  and  modifies  the  demand  for  it 
in  such  a  way  as  to  counteract  the  rise  in  value,  if  that  is 
the  tendency  of  the  movement,  or  the  fall,  if  the  new  force 
is  working  in  that  direction;  but  the  maximum  result  of  this 
counteraction  will  be  to  prevent  a  change  in  the  ratio  of  the 
two  metals.  It  cannot  go  so  far  as  to  make  the  ratio  be- 
tween the  demand  and  the  supply  of  both  metals  precisely 
the  same  as  before.  For  example,  suppose  that  the  pro- 
duction of  silver  were  to  increase  twenty-five  per  cent,  under 
the  bimetallic  system,  all  that  is  claimed  is  that  the  demand 
for  silver  for  monetary  purposes  would  be  increased  and 
that  for  gold  decreased  to  whatever  degree  might  be  nec- 
essary to  prevent  a  change  in  that  ratio,  but  that  would  not 
mean  a  twenty-five  per  cent,  change  on  both  sides,  which 
would  be  required  to  exactly  restore  the  former  ratio  of 
demand  to  supply.  Very  likely  a  twelve  and  one-half  per 
cent,  increase  in  the  monetarv  demand  for  silver  and  a  cor- 


Theory  of  Bimetallism  303 

responding  decrease  in  that  for  gold  would  be  sufficient, 
in  which  case  both  metals  would  have  experienced  a  con- 
siderable fall  in  value,  but  not  so  great  a  fall  as  silver 
would  have  experienced,  had  no  counteracting  agency  been 
in  operation.  If  no  change  had  taken  place  meanwhile  in 
the  value  of  commodities,  prices  would  certainly  rise, 
but  not  in  the  same  degree  as  in  a  silver  monometallic 
country  under  the  same  circumstances,  and,  if  both  metals 
had  previously  been  appreciating  in  their  relation  to  other 
commodities,  this  tendency  would  have  been  checked  and 
perhaps  entirely  counteracted.  As  compared  with  condi- 
tions in  a  gold  monometallic  country  suffering  from  an  ap- 
preciating standard,  the  situation  would  be  much  better,  be- 
cause the  decrease  in  the  demand  for  gold  for  monetary  pur- 
poses might  just  counterbalance  the  increasing  demand 
or  the  decreasing  supply  which  was  the  cause  of  its  apprecia- 
tion in  the  gold-standard  country. 

The  advantage  of  a  fixed  unchangeable  ratio  between 
the  precious  metals  in  the  field  of  international  trade  is 
obvious.  The  chief  difficulty  at  the  present  time  in  this 
branch  of  trade  is  the  lack  of  a  fixed  par  of  exchange  be- 
tween gold-  and  silver-standard  countries.  If  bimetallism 
could  maintain  a  fixed  ratio  between  the  two  metals,  this 
difficulty  would  entirely  disappear,  and  exchanges  between 
the  United  States  and  China  would  be  no  more  hazardous 
than  those  between  England  and  the  United  States  at  the 
present  time. 

4.  The  weak  points  in  the  theory  of  bimetallism. — The 
cornerstone  of  the  theory  of  bimetallism  is  the  doctrine  of 
the  compensatory  action  of  the  double  standard,  and  its 
chief  strength  consists  in  the  fact  that  the  basis  of  this  doc- 
trine is  sound  and  admitted  by  all.  There  can  be  no  doubt 
that  under  a  bimetallic  system  a  substitution  of  one  metal 
for  the  other  for  monetary  purposes  would  be  possible  and 


304  Money  and  Banking 

would  take  place  to  a  certain  extent  whenever  the  market 
value  of  either  was  seriously  affected.  The  important 
question  is,  how  far  would  this  substitution  go,  and  to  what 
extent  would  the  relative  value  of  gold  and  silver  be  affected 
by  it?  A  consideration  of  this  question  will  reveal  one  of 
the  weak  points  in  the  theory. 

The  bimetallists  assume  that  gold  and  silver  are  indef- 
initely interchangeable  for  monetary  purposes,  and  that  the 
only  limit  to  the  possible  substitution  of  one  for  the  other 
in  case  of  a  threatened  change  of  market  ratio  is  the  entire 
discontinuance  of  the  monetary  use  of  the  metal  which  has 
become  relatively  dearer.  Is  this  true?  Is  it  not  at  least 
conceivable  that  the  dearer  metal  might  still  continue  to 
serve  as  money,  but  at  an  enhanced  valuation  as  compared 
with  the  cheaper?  For  example,  suppose  that,  the  legal 
ratio  being  16  to  i,  the  market  ratio  becomes  18  to  i  on 
account  of  a  fall  in  the  value  of  silver,  might  not  gold  still 
continue  to  be  used  for  monetary  purposes,  but  at  a  value 
as  compared  to  silver  of  18  to  i  instead  of  16  to  i?  The 
bimetallists  assume  that  the  law  which  declares  coins  of  the 
two  metals  legal  tender  at  the  latter  ratio  would  prevent 
this,  but  in  so  doing  they  greatly  overestimate  the  power 
of  a  legal-tender  law.  In  spite  of  such  legislation,  money- 
changers, bankers,  and  others  who  have  occasion  to  use 
large  quantities  of  gold  for  monetary  purposes  might  agree 
to  continue  to  use  it  in  the  form  of  bullion,  but  at  an  en- 
hanced value.  Contracts  involving  the  exchange  of  money 
which  were  made  before  the  change  would  be  settled  on  the 
basis  of  the  cheaper  metal,  but  not  necessarily  by  means  of 
it,  and  future  contracts  could  and  would  be  made  on  the 
same  basis,  but  might  perfectly  well  be  settled  in  gold  at 
its  new  value.  A  contract  to  pay  money  under  the  bimetallic 
system  would  not  differ  materially  from  that  of  a  farm 
lease  in  which  the  lessee  is  allowed  the  option  of  paying  his 


Theory  of  Bimetallism  305 

rent  either  in  wheat  or  potatoes,  one  bushel  of  wheat  being 
regarded  as  equivalent  to  two  bushels  of  potatoes  for  this 
purpose.  If,  when  pay-day  arrives,  one  bushel  of  wheat  is 
worth  three  bushels  of  potatoes,  the  farmer  will  certainly 
make  his  payment  in  potatoes,  unless  his  landlord  is  willing 
or  prefers  to  take  wheat  at  its  new  valuation.  If  the  land- 
lord should  really  want  the  wheat  and  not  the  potatoes,  there 
is  no  reason  why  such  an  arrangement  should  not  be  made. 
It  might  be  more  convenient  for  both  parties.  In  like  man- 
ner, under  the  bimetallic  system  the  law  gives  the  debtor  the 
option  of  paying  either  in  gold  or  silver  at  a  given  ratio, 
and,  in  case  of  a  change  in  bullion  values  such  as  we  have 
assumed  above,  authorizes  him  to  pay  in  the  cheaper  metal, 
but  it  does  not  prevent  his  making  other  arrangements  with 
his  creditor.  The  question  here  at  issue  is  really  one  of 
facts,  and  on  that  account  there  is  plenty  of  room  for  dif- 
ference of  opinion.  Is  there  any  reason  for  supposing  that 
under  a  bimetallic  system  gold  might  still  continue  to  be 
used  for  monetary  purposes,  even  if  its  market  value  in 
relation  to  silver  were  considerably  higher  than  that  fixed 
by  law? 

In  a  previous  chapter  we  have  attempted  to  show  that 
gold  has  certain  peculiar  monetary  uses,  and  that  for  these 
it  is  better  than  silver  or  any  other  metal.  This  superiority 
for  certain  purposes  would  not  be  affected  in  the  slightest 
degree  by  the  establishment  of  the  bimetallic  system,  though 
the  use  of  gold  coins  in  the  general  circulation  at  a  value 
different  from  that  expressed  by  the  figures  or  statements 
on  their  faces  would  be  rendered  diffi«ult  and  impracticable 
for  most  people.  Its  use  in  the  payment  of  international 
balances  and  for  shipment  between  different  cities  in  the 
same  country  would  not  be  rendered  more  difficult  or  less 
convenient  by  the  fact  that  its  bullion  rather  than  its  tale 
value  must  be  considered.     In  fact,  in  international  pay- 


3o6  Money  and  Banking 

ments  its  bullion  value  alone  counts,  no  matter  what  may 
be  the  monetary  system,  and  in  great  financial  institutions 
like  the  Bank  of  England  coins  are  always  received  by 
weight  in  order  to  guard  against  loss  from  abrasion.  The 
fact  that  gold  can  be  shipped  and  stored  at  considerably  less 
cost  than  silver  would  give  it  a  preference,  for  the  uses  here 
under  consideration,  which  is  quite  independent  of  legal- 
tender  laws  and  which  would  not  be  affected  by  a  divergence 
between  the  bullion  and  the  legal  ratio  under  a  bimetallic 
system. 

Speculation  regarding  what  would  happen  if  the  bimetal- 
lic system  were  introduced  and  the  value  of  silver  should 
subsequently  fall  is  not  the  most  profitable  of  occupations, 
but  in  this  instance  it  serves  to  show  the  weakness  of  the 
foundation  upon  which  the  bimetallists  have  constructed 
their  main  argument.  If  the  substitution  of  silver  for  gold 
cannot  be  carried  to  the  extent  that  they  claim,  then  it 
becomes  highly  improbable  that  bimetallism  would  be  able 
to  maintain  a  fixed  ratio  between  gold  and  silver.  If  it 
cannot  accomplish  this,  it  is  powerless  to  cure  the  evils  of 
the  present  system. 

Many  people  believe  that  the  real  effect  of  bimetallism 
would  be  to  introduce  what  has  been  called  an  alterna- 
ting standard,  now  of  one  metal  and  now  of  the  other. 
Since  gold  and  silver  are  constantly  fluctuating  with  refer- 
ence to  each  other,  they  hold  that  no  ratio  established  by 
law  could  be  long  maintained,  and  that  the  metal  which  be- 
came relatively  cheap  would  be  the  real  standard,  the  other 
being  used  as  bullion.  Therefore,  if  now  one  and  now 
the  other  metal  should  become  cheaper,  as  measured  by  the 
legal  ratio,  we  should  have  an  alternating  standard.  This 
would  certainly  be  the  result  if  the  claims  of  the  bimetal- 
lists  regarding  the  effect  of  the  compensatory  law  should 
not  prove  true. 


Theory  of  Bimetallism  307 

Another  weak  point  in  the  theory  of  bimetallism  con- 
sists in  the  assumption  that  frequent  minor  fluctuations  in 
prices  are  less  injurious  than  greater  fluctuations  occurring 
at  longer  intervals.  Even  if  the  compensatory  action  should 
be  sufficient  to  maintain  a  fixed  ratio  between  the  precious 
metals,  it  could  not  prevent  a  change  of  prices  whenever 
any  considerable  change  in  the  conditions  of  production  or 
consumption  of  either  of  the  metals  should  take  place.  Un- 
der the  monometallic  system  gold-standard  countries  would 
suffer  only  from  fluctuations  in  the  value  of  gold,  and  silver- 
standard  countries  from  fluctuations  in  the  value  of  silver; 
but  with  bimetallism  both  classes  of  nations  would  suffer 
whenever  either  metal  was  affected.  All  that  is  claimed 
for  this  latter  system  by  its  most  strenuous  advocates  is  that 
the  effects  of  any  change  are  lessened  by  being  spread  over 
a  larger  surface,  but  it  is  at  least  questionable  whether  this 
advantage  is  not  dearly  purchased  at  the  price  of  more  fre- 
quent disturbances. 

It  must,  of  course,  be  admitted  that  the  compensatory 
action  of  the  double  standard  might  be  just  sufficient  to 
counteract  the  tendency  of  one  of  the  metals  to  rise  in 
value  or  of  the  other  to  fall,  but  such  an  effect  would  be 
the  merest  chance,  and  would  rarely,  if  ever,  be  experienced. 

It  is  difficult  to  analyze  the  effects  of  any  change  of 
prices,  and  consequently  not  easy  to  determine  whether  one 
kind  is  better  or  worse  than  another,  but  a  currency  change 
which  would  still  further  complicate  the  situation  cannot 
be  recommended.  That  this  would  be  the  effect  of  bimetal- 
lism is  certain.  It  would  be  next  to  impossible  to  determine 
in  a  given  case  precisely  how  the  compensatory  law  had 
been  operating,  and  to  what  extent  a  given  change  in  prices 
was  due  to  currency  and  to  what  extent  to  other  causes.  It 
is  difficult  now ;  it  would  be  practically  impossible  under 
bimetallism. 


3o8  Money  and  Banking 

5.  National  and  international  bimetallism. — Bimetallists 
may  be  grouped  into  two  classes  according  to  the  degree  of 
faith  they  have  in  the  efficiency  of  the  compensatory  action 
of  the  double  standard.  Some  believe  that  a  single  nation, 
like  England,  France,  Germany,  or  the  United  States,  would 
furnish  a  field  large  enough  for  its  efficient  operation,  while 
others  hold  that  the  cooperative  action  of  several  nations 
would  be  necessary.  International  bimetallists  fear  that  the 
substitution  of  the  cheaper  for  the  dearer  metal  in  the  cur- 
rency of  a  single  nation  might  proceed  to  the  extent  of 
completely  displacing  the  latter  without  bringing  the  bul- 
lion and  the  legal  ratios  together,  but  they  hope  and  believe 
that  this  could  not  happen  if  several  nations  were  to  co- 
operate in  this  matter.  Some  national  bimetallists  go  to 
the  extent  of  admitting  that  they  prefer  an  alternating 
standard  to  a  continuous  single  standard  of  either  metal, 
and  do  not  fear  the  consequences  of  a  complete  disappear- 
ance of  one  of  the  metals  from  circulation.  They  do  not 
hesitate  to  affirm  that  as  between  a  relatively  cheap  and  a 
relatively  dear  standard  they  always  prefer  the  former. 
Such  persons  are  also  willing  to  defend  the  proposition 
that  rising  prices  are  a  blessing,  or  at  least  preferable  to 
falling  prices,  but  they  are  apt  to  overlook  the  fact  that, 
while  bimetallism  always  establishes  the  cheaper  standard, 
it  frequently  does  so  at  the  expense  of  an  otherwise  stable 
one.  It  is,  therefore,  possible  that  under  a  bimetallic  sys- 
tem a  nation  might  be  forced  to  accept  a  depreciating  or 
an  appreciating  standard,  when  with  monometallism  it 
might  have  had  a  stable  one. 

REFERENCES 

On  account  of  the  voluminous  and  controversial  character  of  the 
literature  treating  of  bimetallism  only  a  few  representative  books  and 
articles  will  be  referred  to  here.     For  a  more  complete  bibliography 


Theory  of  Bimetallism  309 

the  student  should  consult  Adolph  Soetbeer,  Litteraturnachweis  iiber 
Geld-und  Miinszvescn  insbcsondere  iiber  den  IVdhrungsstreit,  1871-1891, 
the  bibliographical  references  in  Schonberg,  Handbuch  der  PoUtischen 
Okonomie,  ch.  viii ;  sec.  xi ;  Das  Handworterbuch  der  Staatswis- 
senschaften,  articles  Goldwiihrung,  Parallelwahrung,  and  Doppelwah- 
rung;  and  Palgrave,  Dictionary  of  Political  Economy,  articles  Money, 
Bimetallism  and  Monometallism. 

The  theoretical  aspects  of  the  question  are  well  treated  from  the 
standpoint  of  the  bimetallist  in  the  first  five  books  mentioned  below: 

In  favor  of  bimetallism  are  the  following:  William  Leighton  Jor- 
dan, The  Standard  of  Value;  Leonard  Darwin,  Bimetallism;  D.  Bar- 
bour, The  Theory  of  Bimetallism  and  the  Effects  of  the  Partial 
Demonetization  of  Silver  on  England  and  India;  Robert  Barclay,  The 
Silver  Question  and  the  Gold  Question;  J.  Shield  Nicholson,  Money 
and  Monetary  Problems;  Francis  A.  Walker,  Money,  and  Bimetallism ; 
S.  Dana  Horton,  Silver  and  Gold,  and  The  Silver  Poutid ;  Ernest  Seyd, 
Die  Miins-,  Wdhrungs-  und  Bankfragen  in  Deutschland,  and  Der 
Hauptirrthum  in  der  Goldwdhrung;  Arendt,  Die  vertragsmdssige  Dop- 
pelwdhrung  and  Der  IVdhrungsstreit  in  Deutschland;  Albert  Schiiffle, 
Filr  internationale  Dopplewdhrung;  Adolph  Wagner,  Fiir  bimetallisti- 
sche  Miinspolitik  Deutschland;  M.  Wolokski,  L'Or  et  L' Argent;  Henry 
Cernuschi,  La  Monnaie  BimetalUque ;  and  Emile  de  Laveleye,  La 
Monnaie,  La  Question  Monetaire  en  1881,  and  International  Bimetallism 
and  the  Battle  of  the  Standards. 

Against  bimetallism  are  the  following:  Robert  Giffen,  The  Case 
against  Bimetallism ;  Lord  Farrer,  Studies  in  Currency;  W.  A.  Shaw, 
The  History  of  Currency,  1252  to  1894;  J.  Laurence  Laughlin,  History 
of  Bimetallism  in  the  United  States;  J.  Howard  Cowperthwait,  Money, 
Silver,  and  Finance;  Henry  Dunning  Macleod,  Bimetallism;  Karl 
Knies,  Geld  und  Kredit,  v.  i,  p.  230;  E.  Nasse,  Die  Demonetisation  des 
Silbers  and  Der  IVdhrungsstreit  in  Deutschland;  Bueck,  Beitrdge  zur 
Wdhrungsfrage ;  Hans  Kleser,  Die  dcutschc  Wdhrungsreform  und  Hire 
Gegner,  and  Wdhrungs-  und  Wirtschaftspolitk ;  Moritz  Meyer,  Gold- 
oder  Doppehvdhrung;  and  Frere-Orban,  La  Question  Monetaire. 

A  very  complete  account  of  the  arguments  for  and  against  bimetal- 
lism, together  with  an  excellent  collection  of  materials  for  the  study 
of  the  subject,  is  contained  in  the  Reports  of  the  Royal  Commission  of 
England  appointed  to  inquire  into  the  recent  changes  in  the  relative 
values  of  the  precious  metals.  The  first  report  was  made  in  1887  and 
the  second  and  final  report  in  1888.  M.  Frere-Orban  and  Emile  de 
Laveleye,  La  Question  Monetaire  en  Belgique  en  1889,  also  presents  both 
sides  of  the  question,  M.  Frere-Orban  being  a  monometallist  and  M. 
Laveleye  a  bimetallist.  See  also  Nasse's  and  Arendt's  pamphlets  en- 
titled Der  IVdhrungsstreit  in  Deutschland. 


CHAPTER  XVII 

THE  HISTORY  OF  BIMETALLISM 

In  order  to  appreciate  the  present  status  of  the  contro- 
versy over  bimetalHsm  and  the  practical  aspects  of  the  ques- 
tion, some  knowledge  of  the  world's  experience  with  the 
double  standard  is  necessary.  Not  only  are  questions  of 
fact  involved  in  the  theory  of  the  subject,  but  the  attitude 
of  the  different  states  toward  it  is  determined  much  more 
by  historical  precedents  and  actual  conditions  than  by  theo- 
retical considerations.  In  the  present  sketch  only  an  outline 
of  the  history  of  bimetallism  can  be  presented,  and  more 
space  must  be  given  to  the  statement  of  the  results  of  ex- 
perience than  to  the  details. 

At  the  outset  it  should  be  stated  that  bimetallism  existed 
as  a  fact  long  before  any  theory  of  the  subject  was  devised. 
It  was  not  indeed  until  quite  late  in  the  nineteenth  century 
that  it  became  a  question  for  academic  discussion,  and  the 
use  of  the  word  bimetallism  belongs  to  still  more  recent 
times.  The  formal  histories  of  the  subject  do  not  usually 
go  back  beyond  the  opening  years  of  the  nineteenth  cen- 
tury, but,  though  the  early  experience  is  not  so  instructive 
as  the  later,  some  knowledge  of  it  is  necessary  to  a  complete 
understanding  of  the  subject,  and  we  shall,  therefore,  de- 
vote our  first  section  to  it. 

I.  Early  European  experience. — From  the  beginning  of 

the  fourteenth  to  the  early  years  of  the  nineteenth  century 

every  European  nation  had  a  bimetallic  currency,  in  which, 

however,  silver  played  the  largest  part.     Gold  coins  were 

310 


The  History  of  Bimetallism  311 

introduced  into  western  Europe  by  Italian  traders  as  early 
as  the  thirteenth  century,  but  they  were  not  much  used  in 
commerce  before  the  middle  of  the  fourteenth,  and  their 
value  was  always  estimated  in  terms  of  the  current  silver 
coins.  They  were  not,  however,  subsidiary  in  the  sense  in 
which  we  have  defined  that  term,  but  had  full  legal-tender 
power,  and  were  minted  in  as  large  quantities  as  the  supply 
of  the  metal  and  the  demand  for  it  for  other  purposes  would 
permit. 

The  nature  and  functions  of  money  were  not  understood 
in  the  Middle  Ages,  and  in  consequence  many  of  the  prac- 
tices of  that  period  must  be  attributed  to  ignorance  rather 
than  to  selfishness  or  malice,  though  there  was  no  lack  of 
these  latter  qualities.  The  idea  most  commonly  entertained 
regarding  money  was  that  sovereigns  possess  absolute 
power  over  the  value  of  coins,  and  are  quite  independent  of 
market  conditions.  Accordingly,  they  did  not  consider  it 
improper  to  debase  the  currency  if  they  thought  best,  and 
kept  the  people  informed  regarding  the  purchasing  and 
debt-paying  power  of  coins  by  posting  notices  in  public 
places,  in  which  they  stated  the  equivalence  of  the  various 
coins  in  terms  of  each  other  and  in  those  of  purely  ideal 
standards.  Regarding  these  ideal  standards  it  is  interest- 
ing to  note  that  they  originated  in  the  belief  which  we  have 
just  mentioned.  In  early  times  the  precious  metals  passed 
in  exchange  by  weight,  and  the  unit  of  value  in  every  Eu- 
ropean state  was  a  pound  weight  of  silver.  However,  when 
kings  began  to  exercise  their  supposed  power  to  regulate 
values,  and  debased  the  coinage,  they  retained  the  old 
names  for  the  units,  though  their  former  significance  had 
disappeared  and  a  purely  ideal  conception  had  taken  its 
place.  Thus,  in  England  up  to  the  beginning  of  the  four- 
teenth century  a  pound  weight  of  silver  was  divided  into 
twenty  parts  called  shillings,  and  each  of  these  again  into 


312  Money  and  Banking 

twelve  parts  called  pennies,  but  Edward  I  divided  the  same 
pound  of  silver  into  forty  parts  and  still  called  each  a  shill- 
ing, and  twenty  of  these  shillings  a  pound.  Henceforth  the 
word  pound  meant  nothing  definite,  since  the  king  frequent- 
ly changed  the  weight  and  metallic  content  of  the  shilling, 
but  always  reckoned  twenty  shilHngs  to  the  pound  and 
twelve  pence  to  the  shilling.  When,  therefore,  in  the  public 
notices  of  the  Middle  Ages  we  meet  the  statement  that  such 
a  gold  coin  was  worth  so  many  shillings  and  so  many  pence, 
we  know  nothing  about  its  real  value  until  we  have  learned 
how  much  silver  the  coin  at  that  time  called  a  shilling  really 
contained,  and  when  we  read  that  the  price  of  an  ounce  of 
silver  had  risen  from  3s.  gd.  to  4s.,  it  may  mean  simply  that 
the  weight  of  the  shilling  had  changed. 

In  view  of  these  peculiar  ideas  and  practices,  it  is  not 
surprising  that  currency  conditions  in  the  Middle  Ages 
were  much  confused,  and  that  they  are  very  difficult  to  in- 
terpret. One  fact,  however,  is  clearly  discernible,  and  that 
is  that  the  attempt  to  maintain  the  concurrent  circulation 
of  gold  and  silver  coins  of  full  legal-tender  power  was  a 
complete  failure  and  responsible  for  the  chief  monetary 
difficulties  of  the  times.  The  records  regarding  monetary 
matters  relate  chiefly  to  the  disappearance  now  of  gold  and 
now  of  silver  coins  from  circulation,  and  to  attempts  to 
prevent  this  by  changing  their  equivalence  or  by  recoinage. 
The  cause  was  sometimes  debasement  or  arbitrary  changes 
in  the  equivalence  of  coins  by  means  of  royal  decrees,  and 
sometimes  fluctuations  in  the  value  of  the  metals  on  the 
market.  After  the  discovery  of  America  the  latter  was  the 
most  common,  since  the  conditions  of  production  of  the 
precious  metals  were  revolutionized  by  that  event.  The  ex- 
ploitation of  extraordinarily  rich  mines  in  Mexico,  Peru, 
and  Bolivia  increased  the  estimated  value  of  the  world's 
supply  of  minted  metal  from  thirty-four  to  two  hundred  and 


The  History  of  Bimetallism  313 

forty  millions  of  pounds  sterling  between  1492  and  1636, 
changed  the  market  ratio  of  gold  to  silver  from  about  i  to 
II  to  about  I  to  15^2*  and  increased  the  per  capita  circula- 
tion of  Europe  from  sixteen  to  thirty-six  shillings.* 
The  stream  of  gold  and  silver  which  flowed  from 
these  new  mines  into  Spain  and  afterward  into  every 
country  of  Europe  was  constant,  but  irregular,  and  the  free- 
dom of  its  movement  was  interfered  with  by  inadequate 
means  of  transportation  and  by  the  attempt  of  each  nation 
to  get  all  that  was  possible  and  to  keep  all  that  it  got.  The 
result  was  constant  fluctuation  in  the  purchasing  power  of 
each  of  the  metals  and  in  their  relation  to  each  other,  and 
frequently  the  greatest  divergence  between  the  ratios  ruling 
in  the  different  markets  at  the  same  time.  To  keep  both 
gold  and  silver  coins  in  circulation  at  the  same  time  under 
these  circumstances  was  impossible.  In  spite  of  the  sever- 
est penalties  and  their  not  infrequent  infliction,  the  money- 
changers were  constantly  shipping  the  coins  of  one  nation 
into  the  territory  of  another  where  their  value  was  more 
highly  esteemed,  and  melting  down  undervalued  coins  for 
sale  as  bullion.  A  few  instances  out  of  many  which  might 
be  given  must  suffice. 

The  ratio  between  gold  and  silver  changed  considerably 
on  the  Continent  about  the  year  15 19,  and  almost  imme- 
diately England  began  to  suffer  from  the  exportation  of 
undervalued  coins.  After  a  futile  attempt  to  remedy  the 
difficulty  by  means  of  a  treaty  with  Charles  V,  it  was  de- 
cided to  increase  the  nominal  value  of  the  gold  coins,  and 
accordingly  on  the  22d  of  August,  1526,  crozvns  of  the  sun, 
as  one  species  of  gold  coin  was  named,  were  tariffed  at  4s. 
6d.  instead  of  4s.  4d.,  and  the  ducat  was  raised  from  4s.  6d. 
to  4s.  8d.     Finding  that  this  was  not  sufficient  to  check  the 

*  K.  M's  "Die  geschichtliche  Entwicklung  des  Geldwesens"  p.  12. 


314  Money  and  Banking 

exportation,  on  November  5th  of  the  same  year  all  the  gold 
coins  were  tariffed  at  a  still  higher  rate,  and  in  1527  a  new 
coinage  was  ordered,  in  which  the  weight  of  the  silver  coins 
was  again  changed.  That  the  difficulty  still  remained  is 
evident  from  a  state  paper  of  1529,  which  describes  a  dis- 
pute between  English,  Italian,  Flemish,  and  Spanish  mer- 
chants over  the  effect  of  the  last  edict  about  gold  on  the 
exchanges,  and  in  which  the  writer  recommends  an  increase 
in  the  care  exercised  at  the  ports  to  prevent  the  exportation 
of  gold.  About  1539  the  ratio  between  gold  and  silver  had 
changed  on  the  Continent  to  such  an  extent  that  silver  be- 
gan to  leave  England  instead  of  gold,  and  in  order  to  pre- 
vent this  there  was  a  general  retariffing  of  coins  in  1542 
and  1544.  During  the  next  fifteen  years  the  currency  of 
England  was  brought  into  the  greatest  confusion  by  the 
debasements  of  Henry  VIII  and  Edward  VI  but,  after 
the  recoinage  ordered  by  Elizabeth  in  1559,  honest  efforts 
were  again  made  to  maintain  an  adequate  currency  of  gold 
and  silver,  but  with  the  same  results  as  before.  Elizabeth 
issued  proclamation  after  proclamation  for  this  purpose, 
and  in  1601  changed  the  ratio  between  gold  and  silver  in 
the  coinage,  but  unfortunately  in  the  wrong  direction.  The 
monetary  history  of  England  during  the  seventeenth  and 
eighteenth  centuries  is  simply  a  dreary  recurrence  of  com- 
plaints against  the  exportation  of  coins  and  of  royal  procla- 
mations and  recoinages  for  the  purpose  of  preventing  it  or 
of  turning  the  tide  in  the  other  direction. 

In  France,  Germany  and  the  Netherlands  the  course  of 
events  was  in  all  essentials  the  same  as  that  in  England. 
Constant  changes  in  the  ratio  between  gold  and  silver  and  in 
the  rates  at  which  coins  were  to  be  accepted  was  the  rule 
in  all  these  countries  down  to  the  nineteenth  century.  It  is 
not,  of  course,  possible  to  hold  bimetallism  responsible  for 
all  of  this  confusion.    During  the  greater  part  of  the  period 


The  History  of  Bimetallism  315 

the  coins  of  one  nation  were  legal  tender  in  the  others  at 
rates  fixed  by  royal  proclamation,  and,  since  these  rates 
were  far  from  uniform,  it  was  usually  possible  to  make  a 
profit  by  shipping  coins  from  the  nation  in  which  the  valua- 
tion was  low  to  that  in  which  it  was  higher.  But  bimetal- 
lism increased  these  opportunities  enormously  and  imposed 
upon  the  statesmen  of  the  period  an  impossible  task.  A 
remedy  for  the  under-  or  over-tariffing  of  foreign  coins 
might  have  been  found,  but  the  task  of  keeping  pace  with 
the  fluctuations  in  the  market  value  of  gold  and  silver  by 
changes  in  the  legal  ratio  through  proclamation  or  recoin- 
age  was  hopeless  from  the  beginning. 

2.  Currency  reform  in  England  and  the  act  of  1816. — The 
first  change  in  England's  method  of  dealing  with  her  cur- 
rency difficulties  came  in  1774.  At  that  time  she  was  suffer- 
ing from  the  double  evil  of  a  currency  deficient  in  quantity 
and  in  the  weight  of  the  individual  pieces.  Owing  to  the 
rates  at  which  foreign  coins  were  tariffed,  all  the  full-weight 
gold  and  silver  coins  were  speedily  exported  or  melted 
down,  and  light-weight  money  of  both  domestic  and  foreign 
manufacture  was  alone  in  current  use.  On  the  advice  of 
Lord  Liverpool  a  remedy  was  adopted  which  differed  in 
principle  from  that  which  had  been  employed  over  and  over 
again  in  the  past.  A  recoinage  of  gold  was  ordered,  and 
it  was  decreed  that  the  new  coins  should  not  be  legal  tender 
if  they  were  underweight;  and  that  henceforth  worn  and 
clipped  coins  should  be  accepted  at  their  bullion  value  only. 
Regarding  silver  the  terms  of  the  act  are  still  more  signifi- 
cant. They  are  as  follows:  "And  be  it  further  enacted 
.  .  .  that  no  tender  in  the  payment  of  money  made  in  the 
silver  coin  of  the  realm,  of  any  sum  exceeding  the  sum  of 
£25  at  any  one  time,  shall  be  reputed  in  law  or  allowed  to 
be  legal  tender  within  Great  Britain  or  Ireland  for  more 
than  according  to  its  value  by  weight,  after  the  rate  5s.  2d. 


3i6  Money  and  Banking 

per  oz.  of  silver,  and  no  person  to  whom  such  tender  shall 
be  made  shall  be  in  any  way  bound  thereby  or  obliged  to  re- 
ceive the  same  in  payment  in  any  manner  than  as  aforesaid ; 
any  law,  statute,  or  usage  to  the  contrary  notwithstand- 
ing." In  this  legislation  the  modern  method  of  maintaining 
the  concurrent  circulation  of  gold  and  silver  coins  was  clear- 
ly foreshadowed  and  the  first  step  taken  toward  the  intro- 
duction of  gold  monometallism.  It  was  only  necessary  to 
still  further  limit  the  legal-tender  quality  of  silver  coins, 
and  to  introduce  a  considerable  margin  between  their  tale 
and  their  intrinsic  value,  as  measured  in  gold,  to  make 
them  subsidiary  in  the  modern  sense  of  the  term,  and  thus 
to  take  away  their  capacity  to  drive  gold  out  of  circulation 
and  to  render  their  exportation  unprofitable. 

Nearly  half  a  century  passed  before  these  last  steps  were 
taken,  and  in  the  meantime  the  country  experienced  the 
eflFects  of  the  suspension  of  specie  payments  by  the  Bank  of 
England.  This  happened  in  1797,  and  the  depreciation  of 
the  bank-notes  which  followed  drove  both  silver  and  gold 
out  of  the  country  in  large  quantities,  and  rendered  retail 
and  small  transactions  of  all  kinds  difficult  on  account  of 
the  scarcity  of  small  change.  Tradesmen  were  forced  to 
issue  private  tokens  and  various  other  forms  of  unauthor- 
ized currency  in  order  to  relieve  the  needs  of  the  situation. 
It  was  as  a  remedy  to  this  state  of  affairs  that  the  act  of  1 816 
was  passed,  the  preamble  of  which  reads  as  follows: 
"Whereas  the  silver  coins  of  the  realm  have,  by  long  use 
and  other  circumstances,  become  greatly  diminished  in  num- 
ber and  deteriorated  in  value,  so  as  not  to  be  sufficient  for 
the  payments  required  in  dealings  under  the  value  of  the 
current  gold  coins,  by  reason  w^hereof  a  great  quantity  of 
light  and  counterfeit  silver  coin  and  foreign  coin  has  been 
introduced  into  circulation  within  this  realm,  and  the  evils 
resulting  therefrom  can  only  be  remedied  by  a  new  coinage 


The  History  of  Bimetallism  317 

of  silver  money,"  therefore  be  it  enacted,  etc.  The  sub- 
stance of  the  enactment  was  that  a  Troy  pound  of  silver, 
eleven  ounces  two  pennyweights  fine,  should  be  coined  into 
sixty-six  shilHngs,  but  issued  to  the  importer  or  to  the  pub- 
lic at  the  rate  of  sixty-two  shillings  per  Troy  pound,  and 
that  all  silver  coins  should  henceforth  be  legal  tender  only 
to  the  amount  of  forty  shillings  or  less.  A  portion  of  the 
section  relating  to  this  last  point  is  worth  quoting  on  ac- 
count of  the  clearness  with  which  it  sets  forth  the  intention 
of  Parliament  to  establish  the  gold  standard.  These  are 
the  words :  "And  whereas  at  various  times  heretofore  the 
coins  of  this  realm  of  gold  and  silver  have  been  usually  a 
legal  tender  for  payments  to  any  amount,  and  great  incon- 
venience has  arisen  from  both  these  precious  metals  being 
concurrently  the  standard  measure  of  value  and  equivalent 
of  property,  it  is  expedient  that  the  gold  coin  made  accord- 
ing to  the  indentures  of  the  mint  should  henceforth  be  the 
sole  standard  measure  of  value  and  legal  tender  for  payment 
without  any  limitation  of  amount,  and  that  the  silver  coin 
should  be  a  legal  tender  to  a  limited  amount  only." 

The  principles  established  by  the  act  of  1816  have  not 
been  violated  in  spite  of  the  numerous  efforts  of  other  na- 
tions and  of  many  English  citizens  to  induce  the  Govern- 
ment to  re-introduce  the  double  standard.  Throughout  all 
the  controversies  of  recent  times  English  statesmen  have 
championed  the  cause  of  gold  monometallism  and  have  been 
able  to  point  out  very  substantial  advantages  enjoyed  by 
reason  of  adherence  to  this  system.  Since  1816  there  has 
never  been  any  doubt  regarding  the  value  of  a  sound  bill 
of  exchange  on  England  or  regarding  the  exact  meaning 
of  any  other  contract  calling  for  the  payment  of  pounds, 
shillings,  and  pence.  As  we  have  had  occasion  to  point  out 
in  the  preceding  pages  of  this  book,  this  fact  has  been  one 
of  the  chief  causes  of  England's  long-continued  dominance 


3i8  Money  and  Banking 

in  the  field  of  international  finance,  and  it  is  highly  probable 
that  she  owes  much  of  her  industrial  and  commercial  pro- 
gress to  the  same  cause.  Whoever  may  be  disposed  to 
doubt  this,  however,  cannot  question  the  fact  that  this  act 
put  an  end  to  the  difficulties  which  had  harassed  English 
statesmen  for  centuries  and  had  been  a  constant  drag  upon 
industry  and  commerce.  After  1816  the  currency  problems 
of  England  concerned  her  credit  and  banking  systems  rather 
than  her  coins. 

3.  Bimetallism  in  France  to  1865. — The  experience  of 
France  with  bimetallism  between  the  years  1803  and  1865 
is  most  instructive  because  the  obstacles  which  tended  to 
obscure  its  action  in  the  Middle  Ages  had  by  that  time  been 
swept  away.  Though  the  modern  practice  of  making  silver 
coins  subsidiary  was  foreshadowed  as  early  as  1577,  it  was 
not  introduced  until  late  in  the  nineteenth  century,  and  the 
numerous  proclamations  and  recoinages  of  the  seventeenth 
and  eighteenth  centuries  exhibit  the  application  of  no  prin- 
ciple except  that  involved  in  the  attempt  to  adjust  the  legal 
to  the  market  ratio  of  the  two  metals.  In  1785  the  ratio 
was  finally  fixed  at  15V2  to  i,  where  it  has  remained  until 
the  present  day,  and  in  1803  the  present  unit  of  value,  the 
franc,  and  the  decimal  system  of  reckoning  were  introduced. 
Thus  in  France,  since  1803  at  least  and  until  the  discon- 
tinuance of  the  free  coinage  of  silver  in  1874,  the  bimetallic 
system  had  every  opportunity  to  exhibit  the  normal  effects 
of  its  action.  The  ratio  remained  unchanged  during  the  en- 
tire period,  the  mints  were  opened  freely  to  the  coinage  of 
both  metals,  and  both  were  legal  tender  in  unlimited 
amounts. 

Since  it  is  the  belief  of  the  bimetallists  that  the  com- 
pensatory action  of  the  double  standard  will  prevent  any 
marked  divergence  between  the  legal  and  the  market  ratios 
of  the  two  metals,  we  are  chiefly  interested  in  noting  what 


The  History  of  Bimetallism 


319 


French  experience  teaches  us  regarding  this  matter.  The 
following  table*  gives  the  yearly  fluctuations  in  the  market 
ratio  of  gold  and  silver  from  1803  to  1893  : 


Year 

Ratio 

Year 

Ratio 

Year 

Ratio 

1803 

1833 

15-93 

1863.. 

15-37 

to 

1834 

15 

73 

1864. . 

15-37 

1804 

15.41 

1835 

15 

.80 

1865. . 

15-44 

1805 

15 

79 

1836 

15 

72 

1866. . 

15-43 

1806 

15 

52 

1837 

15 

83 

1867. . 

15-57 

1807 

15 

43 

1838 

17 

85 

1868. . 

15-59 

1808 

16 

08 

1839 

1869. . 

15.60 

1809 

15 

96 

to 

1870. . 

15-57 

I8I0 

15 

77 

1840 

15.62 

1871. . 

15-57 

I8II 

15 

53 

1841 

15 

70 

1872.  . 

15-65 

I8I3 

16 

1 1 

1842 

15 

87 

1873.. 

15-93 

I8I3 

16 

25 

1843 

15 

93 

1874.. 

i6. 17 

I8I4 

IS 

04 

1844 

15 

85 

1875.. 

16. 6a 

I8I5 

15 

26 

1845 

15 

92 

1876. . 

17-77 

I8I6 

15 

28 

1846 

15 

90 

1877.. 

17.2a 

I8I7 

15 

1 1 

1847 

15 

80 

1878.. 

17.92 

I8I8 

15 

35 

1848 

15 

85 

1879.. 

18.39 

I8I9 

15 

33 

1849 

15 

78 

1880. . 

18.04 

1830 

15 

62 

1850 

15 

70 

1881. . 

18.24 

I82I 

15 

95 

1851 

15 

46 

1882.  . 

18.25 

1833 

15 

80 

1852 

15 

59 

1883.. 

18.65 

1823 

15 

84 

1853 

15 

33 

1884. . 

18.63 

1834 

15 

82 

1854 

15 

33 

1885.. 

19-39 

1825 

15 

70 

1855 

15 

38 

1886. . 

20.73 

1826 

15 

76 

1856 

15 

38 

1887.. 

21.13 

1827 

15 

74 

1857 

15 

27 

1888. . 

21.99 

1828 

1858 

15 

38 

1889.  . 

22.09 

to 

1859 

15 

19 

1890. . 

19.17 

1829 

15.78 

i860 

15 

29 

1891.  . 

20.93 

1830. 

15.82 

1861 

15 

26 

1892. . 

33.7a 

I83I. 

15-72 

1862 

15 

35 

1893.. 

36.49 

1832. 

15-73 

*  Shaw,  p.   157.     Figures  taken  from   Hamburg  Exchange  Ratio  to 
1832,  from  1833  onward  from  the  London  Bullion  Brokers'  Ratio. 


320 


Money  and  Banking 


It  will  be  observed  that  at  no  time  during  the  entire 
period  was  the  legal  ratio  15I/2  to  i  realized  upon  the  mar- 
kets. From  1803  to  1807  an  ounce  of  gold  was  worth 
sometimes  more  and  sometimes  less  than  fifteen  and  one- 
half  ounces  of  silver;  during  the  next  seven  years  it  was 
worth  persistently  more,  at  one  time,  in  18 13,  as  much  as 
sixteen  and  one-fourth  ounces ;  then  for  six  years  less ;  and 
from  1819  to  1850,  always  and  increasingly  more.     The 

Table  of  the  Movement  of  Silver  to  and  from  France(i822-i875)* 


Year 


1822. 
1823. 
1824. 


1830. 
1831. 
1832. 

1833- 
1834. 

1835- 
1836. 

1837- 
1838. 

1839. 

1840. 

1841. 

1842. 

1843. 

1844, 

1845. 
1846. 

1847. 
1848. 
1849. 
1850. 


Net  Imports 
(Francs) 


125,000,000 
114,000,000 
124,000,000 


151,000,000 

181,000,000 

60,000,000 

75,000,000 

101,000,000 

74,000,000 

27,000,000 

144,000,000 

120,000,000 

75,000,000 

96,000,000 

117,000,000 

92,000,000 

103,000,000 

82,000,000 

90,000,000 

47,000,000 

53,000,000 

214,000,000 

244,000,000 

73,000,000 


Net  Exports 
(Francs) 


Year 


1851... 
1852... 

1853- •• 
1854... 

1855.  •• 
1856... 

1857- •• 
1858... 

1859- •• 
i860.  .  . 
i86i. . . 
1862..  . 
1863... 
1864. . . 
1865.  .  . 
1866... 
1867. . . 
1868..  . 
1869. .  . 
1870. . . 
1871.  .  . 
1872. . . 
1873... 
1874... 
1875... 


Net  Imports 
(Francs) 


78,000,000 


72,000,000 

45,000,000 

189,000,000 

109,000,000 

112,000,000 

35,000,000 

15,000,000 

102,000,000 

181,000,000 

360,000,000 

194,000,000 


Net  Exports 
(Francs) 


3,000,000 

117,000,000 

164,000,000 

197,000,000 

284,000,000 

360,000,000 

15,000,000 

171,000,000 

157,000,000 

62,000,000 

86,000,000 

68,000,000 

42,000,000 


Shaw,  p.  184. 


The  History  of  Bimetallism 


321 


movements  of  gold  and  silver  to  and  from  the  country  was 
precisely  what  one  would  expect.  Since  from  1819  to 
1850  gold  was  undervalued  at  the  French  mint  and  silver 

Table  of  the  Movement  of  Gold  to  and  from  France  (1822-1875)* 


Year 


1822. 
1823. 
1824. 


1830... 
1831... 
1832... 
1833... 
1834... 

1835-.. 
1836. . . 
1837... 
1838. .. 
1839... 
1840. . . 

1841.  .  . 

1842.  .  . 

1843- •• 
1844.  .  . 

1845-  •• 
1846. . . 

1847- •• 

1848.  .  . 

1849.  .  . 
1850... 


Net  Imports 
(Francs) 


4,000,000 


37,000,000 


10,000,000 
10,000,000 


24,000,000 


24,000,000 
49,000,000 


38,000,000 

6,000,000 

17,000,000 


Net  Exports 
(Francs) 


19,000,000 


39,000,000 


7,000,000 

20,000,000 

14,000,000 

6,000,000 

4,000,000 


5,000,000 
12,000,000 
41,000,000 

6,000,000 
14,000,000 

9,000,000 
13,000,000 


Year 


1851. 
1852. 

1853- 
1854. 

1855- 
1856. 

1857- 
1858. 
1859. 
i860. 
1861. 
1862. 
1863. 
1864, 
1865. 
1866. 
1867. 
1868. 
1869. 
1870. 
1871. 
1872. 

1873- 
1874. 

1875- 


Net  Imports 
(Francs) 


85,000,000 
17,000,000 
289,000,000 
416,000,000 
218,000,000 
375,000,000 
446,000,000 
488,000,000 
539,000,000 
311,000,000 


165,000,000 
12,000,000 
125,000,000 
150,000,000 
465,000,000 
409,000,000 
212,000,000 
275,000,000 
1 19,000,000 


431,000,000 
454,000,000 


Net  Exports 
(Francs) 


24,000,000 


214,000,000 

53,000,000 

108,000,000 


overvalued,  it  was  profitable  to  import  the  latter  metal  and 
either  to  export  the  former  or  to  use  it  for  other  than  cur- 
rency purposes.  Up  to  1822  the  precious  metals  were  not 
distinguished  in  the  public  records  of  imports  and  exports, 
and,  hence,  it  is  possible  only  to  give  figures  for  the  last 

*Shaw,  p.   183. 


322  Money  and  Banking 

twenty-nine  years  of  the  period.  The  preceding  table, 
on  page  320,  covers  a  longer  period,  but  is  inserted  in  full 
for  future  reference. 

It  will  be  observed  that  in  every  year  of  the  entire  period, 
1822  to  1 85 1,  the  net  imports  of  silver  were  large,  and  that 
the  opposite  movement  quite  as  persistently  characterized 
the  next  period. 

The  net  importation  of  gold  in  the  period  185 1  to  1867 
is  quite  as  striking,  that  metal  being  overvalued  at  the  mint 
during  the  entire  period.*    The  figures  are  on  p.  321. 

The  exports  of  the  precious  metals  are  less  significant 
than  the  imports,  because  it  is  not  necessary  that  they  should 
leave  the  country  when  they  are  undervalued  at  the  mint. 
They  may  be  sold  on  the  bullion  markets  at  home  and  ab- 
sorbed in  the  arts,  or  hoarded.  Neither  do  statistics  of  the 
gold  and  silver  coins  struck  at  the  mint  always  tell  the 
story  of  the  operation  of  the  compensatory  law.  It  is  not 
necessary  that  coins  issued  from  the  mint  should  enter  into 
the  general  circulation.  They  may  be  hoarded  or  exported 
or  even  sold  upon  the  bullion  market.  As  indicated  in  the 
preceding  chapter,  it  is  even  possible  that  gold,  undervalued 
at  the  mint,  may,  by  special  agreement,  continue  some  of 
its  monetary  functions,  but  at  its  market  instead  of  its  legal 
value.  The  importation  of  the  overvalued  metal,  however, 
is  certain,  unless  conditions  are  precisely  the  same  in  other 
countries,  because  in  the  form  of  the  coins  of  the  country 
in  which  there  is  overvaluation  it  is  worth  more  than  in  any 
other  form.  It  is,  therefore,  sent  to  the  mints  of  such  a 
country  from  all  quarters,  in  accordance  with  the  law  by 
which  commodities  are  impelled  to  seek  the  best  markets. 
However,  the  above  tables  show  that  gold  was  exported  in 
considerable  quantities  during  the  years  1834  to  1838  and 
1 841  to  1847.  ^"d  that  the  net  exports  of  silver  were  very 
large  every  year  from  1853  ^^^4  inclusive.     The  relative 


The  History  of  Bimetallism  323 

amounts  of  these  metals  brought  to  the  mints  for  coinage 
also  indicate  the  operation  of  the  bimetallic  system,  though 
there  was  at  no  time  a  complete  discontinuance  of  the  coin- 
age of  either  metal.     [See  Appendix,  p.  36^]. 

Regarding  the  effects  of  the  divergence  between  the  legal 
and  the  market  ratios  upon  the  monetary  use  of  these  two 
metals  during  this  period  the  following  statement  quoted  by 
Mr.  William  Shaw*  from  an  official  explanation  of  the 
reasons  for  introducing  a  subsidiary  currency  into  France 
in  1876  is  significant:  "The  variations  of  the  commercial 
from  the  legal  15^  ratio  remained  normal  during  the  years 
1824-67.  All  the  same  they  sufficed  to  modify  greatly  the 
composition  of  the  French  circulation.  After  the  predomi- 
nance of  silver,  which  became  marked  in  1847,  the  ratio 
from  1847-67  introduced  gold  in  a  large  proportion,  and 
measures  had  to  be  taken  to  retain  in  France  the  smaller 
silver  coinage." 

The  causes  of  the  fluctuations  in  the  relative  values  of 
the  precious  metals  must  be  sought  in  an  analysis  of  their 
demand  and  supply.  For  the  period  now  under  considera- 
tion this  is  a  difficult  process,  owing  to  the  absence  of  de- 
tailed information  regarding  all  the  facts  involved,  and  it 
w^ould  be  impossible  here  in  any  case  on  account  of  a  lack 
of  space.  Three  events,  however,  throw  considerable  light 
upon  the  situation,  and  will  suffice  for  our  purposes.  The 
first  is  the  great  increase  in  the  amount  of  silver  produced 
in  the  closing  years  of  the  eighteenth  and  the  early  years  of 
the  nineteenth  century ;  the  second  is  the  resumption  of  specie 
payments  in  England  in  1822 ;  and  the  third  is  the  enormous 
increase  in  the  annual  production  of  gold  after  1850.  During 
the  first  eighty  years  of  the  eighteenth  century  the  average 
annual  production  of  silver  had  been  in  weight  from  21.6 

*History  of  Currency,  p.  187. 


324  Money  and  Banking 

to  31.5  times  that  of  gold,  while  in  the  forty  years  inter- 
vening between  1780  and  1820  it  was  never  less  than  47.2 
times  that  of  gold,  and  for  the  ten  years  1800  to  18 10  aver- 
aged 50.2  times  as  much.*  It  was  natural,  therefore,  that 
the  value  of  silver  should  fall  below  that  established  by  law 
in  France  in  1803,  which  was  not  far  from  the  market 
value  at  that  date.  The  natural  effect  of  the  resumption  of 
specie  payments  in  England  was  to  increase  the  demand  for 
gold,  that  being  the  standard  money  of  the  country  after 
the  passage  of  the  act  of  1816.  This  fact  considered  in  con- 
nection with  the  continued  large  annual  production  of  silver 
as  compared  with  gold  goes  far  toward  explaining  why 
silver  did  not  recover  its  value  during  the  next  thirty  years. 
The  effect  of  the  increased  production  of  gold  after  1850 
is  not  questioned  by  anyone.  The  only  marvel  is  that  the 
value  of  this  metal  did  not  fall  to  a  much  lower  point  than 
was  actually  the  case.  The  facts  regarding  the  matter  are 
as  follows  :**  On  account  of  the  exploitation  of  very  rich 
gold  mines  discovered  in  Australia  and  California  the  an- 
nual production  of  that  metal  increased  from  about  $15,- 
000,000  in  1840  to  an  average  of  more  than  $137,000,000 
for  the  five  years  1850  to  1855,  and  to  an  average  of  more 
than  $143,000,000  for  the  succeeding  five  years.  It  did 
not  fall  to  so  low  a  figure  as  $100,000,000  until  1874,  and 
then  for  two  years  only.  While  the  production  of  silver 
began  to  increase  greatly  at  about  the  same  period  and 
has  continued  at  a  high  rate  ever  since,  its  proportion 
to  that  of  gold  fell  tremendously  in  185 1  and  has  never 
been  restored.  While  in  weight  it  was  50.2  times  as  great 
in  the  decade  1801  to  1810,  it  was  only  4.4  times  as  great 

*  Laughlin's  History  of  Bimetallism,  ist  ed.,  p.  42. 
♦*Laughlin,  pp.  217  and  218. 


The  History  of  Bimetallism  325 

in  the  period  1851-60,  and  between  six  and  seven  times  as 
great  during  the  next  ten  years.*  The  fall  in  the  purchasing 
power  of  gold  over  commodities  during  this  period  has  been 
variously  estimated,  but  it  was  probably  not  less  than  nine 
nor  more  than  fifteen  per  cent.  The  change  in  its  ratio  to 
silver  is  indicated  in  the  table  on  p.  319.  On  account  of  its 
overvaluation  at  the  mint  France  received  more  than  her 
share  of  this  metal  and  silver  began  to  disappear  from  circu- 
lation, causing  a  scarcity  of  small  coins  and  finally  compel- 
ling the  government  to  make  all  silvevr  coins,  except  the 
five-franc  piece,  subsidiary. 

In  1865  the  history  of  bimetallism  in  France  entered 
upon  a  new  phase,  before  describing  which,  however,  it  will 
be  well  to  note  some  of  the  early  monetary  experiences  of 
the  United  States.  Regarding  the  general  results  of  its  oper- 
ation during  the  period  here  under  discussion,  there  can  be 
no  question,  however  much  people  may  differ  regarding 
the  explanation  of  specific  phenomena.  It  did  not  succeed 
in  preventing  divergence  between  the  legal  and  market  ra- 
tios of  the  two  metals,  and  the  dominance  now  of  one  and 
now  of  the  other  in  the  circulating  medium,  and  it  did  sub- 
ject French  commerce  to  great  inconvenience  by  rendering 
it  difficult  and  at  times  impossible  to  keep  in  circulation  an 
adequate  supply  of  small  change,  not  to  speak  of  the  uncer- 
tainty attending  the  change  of  the  standard  in  185 1  from 
silver  to  gold.  As  compared  with  the  peaceful  course  of 
England,  the  continued  occupation  of  the  French  govern- 
ment with  harassing  coinage  questions  during  the  entire  cen- 
tury is  an  object  lesson  which  should  not  be  overlooked. 

4.  Bimetallism  in  the  United  States  to  1873. — The  ex- 
perience of  the  United  States  with  bimetallism  admirably 
supplements  that  of  France  because  it  exhibits  the  effects  of 

*Laughin,  p.  42. 


326  Money  and  Banking 

two  ratios,  one  above  and  the  other  below  that  of  the 
French  mint.  From  1792  to  1834  the  mint  ratio  in  this 
country  was  15  to  i,  and  since  the  latter  date  it  has  been 
16  to  I.  It  will  be  well,  therefore,  to  separate  these  two 
periods  in  our  discussion. 

A,  The  Period  from  1792  to  1834. — The  adoption  of  bi- 
metallism and  of  the  ratio  15  to  i  was  chiefly  the  work  of 
Alexander  Hamilton,  who  was  the  author  of  our  monetary 
system.  Previous  to  the  passage  of  the  act  of  1792,  or 
rather  to  the  execution  of  the  provisions  therein  contained, 
our  currency  consisted  of  foreign  coins,  chiefly  English  and 
Spanish,  and  of  the  mintages  and  paper  money  of  the  va- 
rious colonies.  It  was  inadequate  in  quantity  and  extremely 
inconvenient  on  account  of  its  numerous  and  varied  ele- 
ments. It  was  Hamilton's  belief  that  the  bimetallic  system 
was  necessary  in  order  to  secure  an  adequate  supply  of  the 
precious  metals  for  coinage  purposes,  and  the  ratio  15 
to  I  was  adopted  because  it  was  thought  to  represent  ap- 
proximately the  market  value  of  the  precious  metals  at  that 
time.  Two  or  three  years  were  required  after  the  passage 
of  the  act  of  1792  before  a  mint  could  be  constructed  and 
equipped,  and  the  new  system  actually  put  into  operation, 
and  meanwhile  the  market  ratio  changed,  silver  falling  in 
value  relatively  to  gold.  According  to  Mr.  Soetbeer,  it  was 
15.37  to  I  in  1794,  15.55  to  I  in  1795,  15.65  to  i  in  1796, 
15.41  to  I  in  1797,  15.59  to  I  in  1798,  15.74  to  i  in  1799, 
15.68  to  I  in  1800.  15.46  to  I  in  1801,  and  15.26  to  i  in 
1802*  Practically  from  the  beginning,  therefore,  there  was 
a  divergence  between  the  market  and  the  mint  ratios,  and 
silver  was  overvalued.  Being  a  very  new  country,  however, 
situated  a  long  way  from  Europe,  and  commerce  being  but 

♦For  the  ratio  at  dates  subsequent  to  1802  see  table  on  p.  319. 


The  History  of  Bimetallism  327 

slightly  developed,  the  markets  of  the  United  States  were 
sluggish  and  did  not  respond  quickly  to  foreign  influences. 
There  was  a  great  demand  for  money,  and  accordingly 
both  gold  and  silver  were  minted,  in  considerable  quantities, 
but  in  time,  and  probably  as  early  as  18 10,*  gold  began  to 
disappear  from  circulation,  and  ultimately  in  such  quantities 
as  to  attract  the  attention  of  Congress.  From  about  1818  on 
also,  the  coinage  of  silver  greatly  increased,  while  that  of 
gold  relatively,  and  in  some  years  absolutely,  decreased. 

The  action  of  the  bimetallic  system  was  somewhat  ob- 
scured and  complicated  during  this  period  by  the  circulation 
of  various  foreign  coins  and  by  inadequately  secured  bank- 
notes. Spanish  silver  dollars  were  full  legal  tender,  and, 
since  they  contained  more  silver  than  the  corresponding 
coins  of  the  United  States,  they  were  hoarded  by  bankers 
and  money-changers  or  sent  to  the  mint  for  recoinage,  and, 
since  both  coins  passed  at  their  face  value  among  the  people 
generally,  a  profitable  trade  was  carried  on  by  sending  our 
silver  dollars  to  the  West  Indies  and  transporting  hither 
the  heavier  Spanish  coins.  On  this  account  the  coinage  of 
silver  dollars  was  suspended  in  1805,  b^-^t  the  traffic  still  con- 
tinued to  be  carried  on  with  our  smaller  coins.  The  result 
was  that  only  worn  and  clipped  foreign  silver  coins  were 
in  actual  circulation,  and  there  was  a  great  dearth  of  the 
kind  of  money  needed  for  ordinary  transactions.  In  conse- 
quence of  the  w^ar  with  England,  in  the  years  1814  to  1816, 
there  was  a  general  suspension  of  specie  payments  by  the 
banks  of  the  country,  and  consequently  so  great  a  deprecia- 
tion of  bank-notes  that  coins  of  all  kinds  were  driven  out 
of  circulation. 

Though  the  situation  was  much  confused  by  these  dis- 
orders, the  resumption  of  specie  payments  in  1818  brought 

*See  Laughin,  chap.  iii. 


328  Money  and  Banking 

into  clear  light  the  effect  of  the  undervaluation  of  gold  at 
the  mint.  It  did  not  return  to  circulation,  and  the  ex- 
changes of  the  country  were  practically  on  a  silver  basis, 
and  all  large  payments  had  to  be  made  in  bank-notes.  Ow- 
ing to  the  general  distrust  of  this  latter  form  of  currency, 
caused  by  our  unfortunate  experiences  with  paper  money 
during  colonial  times,  the  Revolutionary  War,  and  the  pe- 
riod of  suspension,  and  fostered  by  President  Jackson  and 
his  supporters  during  their  fight  to  prevent  the  recharter 
of  the  Second  United  States  Bank,  a  strong  party  arose  in 
favor  of  such  a  change  in  the  ratio  as  would  bring  gold 
again  into  circulation.  Aided  undoubtedly  by  the  discovery 
of  gold  mines  in  South  Carolina,  this  party  was  able  in 
1834  to  secure  the  passage  of  an  act  by  which  the  mint  ratio 
was  made  16  to  i.  Though  it  was  generally  known  that 
this  was  an  overvaluation  of  gold,  the  desire  to  restore  this 
metal  to  circulation  was  so  great  that  the  party  in  power 
did  not  wish  to  take  any  chances  in  the  matter,  and  many 
probably  believed  that  the  tendency  of  silver  was  to  fall  still 
more  in  value,  and  that  it  was,  therefore,  best  to  antici- 
pate to  some  extent  the  probable  course  of  events  in  the 
future.  The  change  from  the  old  to  the  new  ratio  was  ac- 
complished by  diminishing  the  amount  of  pure  metal  in  the 
gold  eagle  from  247.5  ^o  232  grains,  the  amount  of  pure 
silver  in  the  dollar  remaining  unchanged  at  371.25  grains. 

B.  The  period  from  1834  to  1873. — Whatever  may  have 
been  the  expectations  of  the  framers  of  the  act  of  1834, 
the  ratio  between  gold  and  silver  upon  the  markets  did  not 
greatly  change  during  the  next  sixteen  years,  and  never 
became  16  to  i.  With  the  fall  in  the  value  of  gold  which 
accompanied  the  greatly  increased  supply  after  1850,  it  di- 
verged more  and  more  from  that  point,  and  did  not  show 
any  marked  tendency  to  turn  in  the  other  direction  until 
about  1867.     The  result  was  at  first  a  gradual  substitution 


The  History  of  Bimetallism  329 

of  gold  for  silver  in  the  currency,  and,  after  the  gold  dis- 
coveries, the  disappearance  of  silver  to  such  an  extent  as 
seriously   to   interfere   with   commerce   and   to   cause   the 
issue   of   private   tokens   and   other  monetary   devices   to 
take  the  place  of  small  coins.     The  situation  compelled 
Congress  again  to  take  up  the  question  of  the  coinage, 
and   this  time  the   remedy   to   which   England   had   been 
forced  under  similar  circumstances  in  1816  was  adopted, 
namely,   the  reduction  of  the  small  silver  coins  to  a  sub- 
sidiary basis.     The  act  by  which  this  was  accomplished 
was  passed  in   1853,  and  it  diminished  by  6.91   per  cent 
the  content  in  pure  silver  of  all  coins  below  the  denomi- 
nation  of   a   dollar.      Heretofore   the   half-dollars,   quar- 
ter-dollars, dimes,  etc.,  had  contained  respectively  one-half, 
one-quarter,  one-tenth,  etc.,  of  the  amount  of  metal  put  into 
the  dollar,  but  henceforth  two  half-dollars  were  to  contain 
only  345.6  instead  of  371.25  grains  of  pure  silver,  and  384 
instead  of  4121^  grains  of  standard  silver,  and  the  other 
coins  in  proportion.    This  act  also  took  away  the  free-coin- 
age privilege  in  the  case  of  these  coins,  and  made  them  legal 
tender  for  sums  of  five  dollars  and  under  only. 

The  effect  of  this  act  was  to  place  the  currency  of  the 
United  States  upon  a  gold  basis.  Nominally,  however,  it 
still  remained  bimetallic  because  by  law  the  silver  dollar  was 
still  authorized  to  be  freely  coined  at  the  mint  at  the  ratio 
with  gold  of  16  to  I,  and  its  legal-tender  power  had  not  yet 
been  removed.  Since  it  was  worth  a  premium  of  four  or 
five  cents  per  dollar  in  gold,  however,  it  did  not  form  an 
element  in  the  currency,  and  had  not  done  so  since  1834. 

From  1862  to  1879  legal-tender  government  notes,  issued 
as  a  financial  expedient  during  the  war  between  the  states, 
constituted  the  basis  of  the  currency  of  the  United  States, 
their  depreciation  having  expelled  from  circulation  both 
gold  and  silver,  even  the  subsidiary  coins.    The  annals  of 


330  Money  and  Banking 

this  period,  therefore,  are  not  significant  in  the  history  of 
the  operation  of  the  double  standard,  and  could  be  passed 
over  in  silence,  were  it  not  for  the  act  of  1873  and  the  con- 
troversy of  which  it  was  the  occasion  in  subsequent  years. 
The  purpose  of  this  act  was  to  bring  together  in  one  code 
the  laws  which  were  in  force  at  the  mint  and  to  eliminate 
their  obsolete  features,  one  of  which  was  supposed  to  be 
the  authority  to  coin  a  silver  dollar  which  was  then  at  a  pre- 
mium in  gold,  and  had  not  been  a  part  of  the  circulating 
medium  since  1834,  and  has  played  but  a  very  insignificant 
role  since  1805.  Accordingly  in  the  enumeration  of  the 
list  of  coins  authorized  to  be  struck  at  the  mint,  the  silver 
dollar  was  omitted,  and  our  currency  was  thereby  made  gold 
monometallic  in  law  as  well  as  in  fact. 

This  act  had  no  immediate  effect  upon  the  currency  of 
the  United  States,  and  only  a  subjective  one  upon  the  rela- 
tions between  gold  and  silver  in  other  parts  of  the  world, 
inasmuch  as  only  inconvertible  paper  was  in  circulation  at 
the  time.  However,  it  did  become  significant  when  we  re- 
sumed specie  payments  six  years  later,  and  even  before, 
owing  to  the  authorization  of  resumption  by  an  act  passed 
in  1875  and  a  sudden  drop  in  the  value  of  silver  in  the  fol- 
lowing year,  an  event  which  must  be  explained  before  we 
can  profitably  proceed  with  our  account  of  the  history  of 
bimetallism. 

5.  The  fall  in  the  value  of  silver  after  1875.— The  table  of 
ratios  on  p.  319  shows  that  the  value  of  silver  as  measured 
by  gold  steadily  and  persistently  fell  after  1859.  and  that  its 
downward  pace  was  greatly  accelerated  in  1875  and  1876. 
This  was  due  to  great  changes  in  the  relation  between  the 
demand  and  the  supply  of  the  two  metals  caused  in  part  by 
an  increase  in  the  production  of  silver  and  a  diminution  in 
the  amount  coined,  and  in  part  by  a  large  increase  in  the 


The  History  of  Bimetallism  331 

use  of  gold  for  currency  purposes.  The  statistics  of  the 
production  of  the  precious  metals  given  in  the  Appendix 
show  a  steady  gain  in  the  proportion  of  the  annual  output 
of  silver  to  gold  after  i860.  For  the  five  years  1865  to 
1870  the  annual  average  increase  in  the  production  of  silver 
over  that  of  the  preceding  quinquennial  period  was  $10,- 
700,000  while  in  the  case  of  gold  it  was  only  $4,725,000. 
For  the  next  five  years  the  figures  for  silver  show  an  annual 
increase  of  $28,375,000,  while  those  for  gold  show  a  de- 
crease of  $14,800,000.  In  the  period  1876  to  1880  the  in- 
crease for  silver  was  $23,875,000,  while  the  production  of 
gold  but  little  more  than  held  its  own.  To  these  figures 
must  be  added  the  annual  sales  of  silver  bullion  by  Ger- 
many in  the  years  1773  to  1879  inclusive,  amounting  in 
the  aggregate  to  $141,784,948.*  The  chief  cause  of  this 
increase  in  the  production  of  silver  was  the  discovery  of 
very  rich  mines  in  the  western  part  of  the  United  States, 
especially  in  Nevada. 

On  the  demand  side  the  case  is  not  so  simple,  but  that 
there  was  a  falling  off  in  certain  quarters  and  a  limitation 
in  others  of  the  field  for  the  extension  of  the  use  of  silver 
as  money  is  clear.  During  the  years  1871  to  1876  Ger- 
many introduced  her  present  monetary  system,  which  in- 
volved a  change  from  the  silver  to  the  gold  standard.  This 
was  accomplished  by  acts  passed  in  1871  and  1873,  ^h^  ^^^^ 
authorizing  an  Imperial  gold  coinage,  and  the  second  its 
substitution,  together  with  a  new  Imperial  silver  coinage 
issued  on  a  subsidiary  basis,  for  the  old  silver  coins  which 
had  been  previously  minted  by  the  various  states  out  of 
which  the  empire  was  formed.  The  amount  of  silver  re- 
quired for  the  new  coins  was  very  much  less  than  that  for- 
merly in  circulation,  and  accordingly  a  considerable  quantity 

♦Laughin,  p.  141. 


332  Money  and  Banking 

of  the  metal  accumulated  in  the  Imperial  treasury,  a  por- 
tion of  which  was  sold  between  the  years  1873  and  1879. 
So  far  as  Germany  is  concerned,  therefore,  there  was  a  con- 
siderable falling  off  in  the  demand  for  silver,  accompanied 
by  an  addition  to  the  supply  thrown  upon  the  bullion  market. 

During  the  entire  nineteenth  century  India  served  as  the 
chief  outlet  for  the  surplus  silver  of  the  world.  Her  capa- 
city to  absorb  this  metal  seemed  for  a  time  to  be  unlimited, 
a  peculiar  fact  due  to  the  custom  of  hoarding  the  precious 
metals  as  a  means  of  saving,  and  to  their  extensive  use  in 
the  manufacture  of  idols  and  personal  ornaments.  During 
the  decade  1857-67  the  Indian  demand  was  abnormally 
great  on  account  of  the  Sepoy  rebellion,  the  transfer  of  the 
government  from  the  East  India  Cornpany  to  the  crown, 
the  construction  of  railways  and  other  public  works,  and 
the  importation  of  cotton  to  Europe  to  take  the  place  of  the 
American  exportation  temporarily  stopped  by  the  war  be- 
tween the  states.  All  of  these  events  gave  occasion  for  the 
shipment  of  unusual  quantities  of  silver  from  Europe  to 
India.  About  1867  a  marked  change  in  this  situation  is  ob- 
servable, the  imports  of  silver  into  India  decreasing  great- 
ly. [See  Appendix.]  The  reason  for  this  seems  to  have 
been  the  disappearance  of  the  main  sources  of  extraordinary 
demand  and  the  beginning  of  annual  interest  payments  on 
the  large  public  debts  which  the  events  above  mentioned  oc- 
casioned. These  payments  were  due  to  England  chiefly, 
and  were  made  by  the  sale  in  London  of  bills  of  exchange 
on  India,  the  purchase  and  shipment  of  which  by  people 
who  had  debts  to  pay  there  to  a  considerable  extent  now 
taking  the  place  of  silver.  From  1867  on,  therefore,  there 
was  evidently  a  relative  decrease  in  the  demand  for  silver 
from  this  quarter. 

A  limitation  of  the  field  for  the  monetary  use  of  silver 
was  caused  not  only  by  the  events  in  Germany  already  de- 


The  History  of  Bimetallism  333 

scribed,  but  also  by  the  reduction  of  small  silver  coins  to  a 
subsidiary  state  in  the  United  States  and  throughout  Eu- 
rope generally,  and  by  limitations  placed  upon  the  minting 
of  larger  silver  coins  in  the  states  of  the  Latin  Union  and 
in  this  country.  Before  describing  the  means  by  which  this 
was  brought  about,  however,  we  must  note  the  main  causes 
for  the  increase  in  the  demand  for  gold,  which  also  helps 
to  explain  the  relative  fall  in  the  value  of  silver. 

Reference  again  to  the  table  on  p.  319  will  show  that  the 
divergence  between  the  bullion  and  the  legal  ratios  in  both 
France  and  the  United  States  was  favorable  to  the  intro- 
duction of  gold  into  the  currencies  of  those  countries  after 
1853.  That  it  was  so  introduced  in  large  quantities  is  ren- 
dered certain  by  the  statistics  of  the  mints  of  the  two  coun- 
tries and  by  many  other  kinds  of  contemporary  evidence. 
The  same  may  be  said  of  Switzerland  and  Belgium, 
whose  monetary  systems  were  assimilated  to  that  of  France 
after  1865,  and  of  the  Netherlands,  Denmark,  and  the  Scan- 
dinavian countries  whose  monetary  movements  closely  fol- 
lowed those  of  Germany.  In  this  latter  country,  as  we 
have  seen,  gold  became  the  standard  of  value  in  1873,  and 
has  constituted  an  important  part  of  the  circulating  medium 
ever  since.  In  Italy  and  Austria  the  circulation  of  coin  was 
small  during  this  period  on  account  of  the  currency  of  in- 
convertible legal-tender  notes,  and  in  the  United  States 
from  1862  to  1879  gold  played  a  smaller  role  for  the  same 
reason.  It  has  been  estimated  that  between  1850  and  1876 
not  far  from  two  billions  of  dollars'  worth  of  gold  were 
absorbed  by  the  currencies  of  the  various  countries.* 
When  it  is  remembered  that  before  1850  silver  was  the  chief 
money  metal  everywhere  except  in  England,  the  effect  of 
this  change  in  demand  upon  the  relative  values  of  the  two 
metals  will  become  evident. 

*Laughin,  p.  174. 


334  Money  and  Banking 

In  explanation  of  this  great  increase  in  the  demand  for 
gold,  the  chief  emphasis  must  be  laid  upon  the  enormous 
growth  of  commerce  on  a  large  scale  since  the  middle  of 
the  nineteenth  century.  It  was  this  which  made  gold  ac- 
ceptable to  all  the  nations  and  preferred  to  silver  for  all 
purposes  except  that  of  small  payments;  and  it  was  this, 
therefore,  which  more  than  any  other  one  thing  accounts 
for  the  changes  in  legislation  which  have  been  noted.  Ger- 
many was  doubtless  influenced  in  her  action  by  the  large 
indemnity  in  gold  which  she  forced  France  to  pay  her  as 
the  price  of  peace  in  187 1,  but  it  was  chiefly  because  of  the 
belief  of  her  statesmen  in  the  superiority  of  the  gold  over 
the  silver  standard  for  modern  commercial  nations  that  she 
demanded  the  payment  of  so  large  a  portion  of  that  indem- 
nity in  gold. 

6.  The  Latin  Union. — We  are  now  prepared  to  resume 
our  account  of  the  history  of  bimetallism  in  France  and  the 
United  States.  Regarding  the  former  country  the  most  im- 
portant facts  to  be  noticed  are  connected  with  a  monetary 
convention  or  agreement  formed  with  Belgium,  Switzer- 
land, and  Italy,  December  23,  1865.  The  events  leading 
up  to  this  treaty  are,  briefly  stated,  as  follows : — 

For  some  years  previous  to  1865  the  unit  of  value  in  all 
these  nations  had  been  the  franc,  and  in  other  respects  there 
was  a  general  similarity  between  their  coinage  systems. 
When  gold  began  to  fall  in  value  relatively  to  silver  after 
the  great  discoveries  of  1849  ^"^  1^5^  they  were  all  troubled 
by  a  scarcity  of  small  coins.  Silver  money  was  being  rapid- 
ly melted  down  and  exported,  and  the  gold  coins  which  took 
its  place  were  of  too  large  denominations  to  serve  the  pur- 
poses of  small  change.  The  proper  remedy  for  this  diffi- 
culty was  the  issue  of  a  subsidiary  silver  currency,  and  to 
this  Switzerland  resorted  in  i860  by  an  act  which  reduced 


The  History  of  Bimetallism  335 

the  fineness  of  all  her  silver  coins,  except  the  five-franc 
piece,  to  eight-tenths,  and  made  this  latter  coin  her  unit 
instead  of  the  franc.  Inasmuch  as  the  similarity  of  their 
systems  had  made  the  circulation  of  the  coins  of  each  coun- 
try common  in  all  the  others,  these  Swiss  coins  of  low  in- 
trinsic value  began  to  be  substituted  for  the  more  valuable 
ones  of  the  other  states,  and  the  latter  to  be  brought  to  the 
Swiss  mints  for  recoinage.  In  order  to  prevent  this,  April 
14,  1865,  the  French  government  prohibited  the  receipt  of 
Swiss  coins  at  all  public  offices,  and  the  government  of  Bel- 
gium suggested  a  conference  of  delegates  from  all  the  coun- 
tries affected.  This  met  in  Paris  on  November  20,  1865, 
and  the  result  of  its  deliberations  was  the  treaty  above 
mentioned. 

In  accordance  with  the  agreement  at  that  time  made,  a 
subsidiary  coinage  of  silver  .835  fine,  limited  in  quantity 
to  six  francs  per  capita,  was  introduced  into  all  these  na- 
tions, but  the  five-franc  piece  was  retained  as  a  standard 
silver  coin  to  be  freely  minted  at  the  old  ratio  of  15V2  to  i. 
The  double  standard  was  thus  retained,  but  its  operation, 
so  far  as  silver  was  concerned,  was  confined  to  the  five- 
franc  piece. 

The  commercial  ratio  between  silver  and  gold  in  1865 
was  not  far  from  15V2  to  i,  but,  as  we  have  seen,  it  began 
to  change  about  two  years  later,  and  silver  fell  very  rapidly 
in  1875  and  subsequently.  By  1873  this  fact  began  to  make 
itself  evident  in  a  large  increase  in  the  number  of  five-franc 
pieces  struck  from  the  mints,  in  France  from  5,000.000  to 
154,000,000  francs,  and  in  Belgium  from  33,000,000  to 
111,000.000  francs.*  In  the  same  year  Germany  began 
the  withdrawal  of  her  old  silver  currency  and  the  sale  of 
a  portion  of  the  surplus,  and  the  countries  of  the  Latin 
Union  with  good  reason  began  to  fear  that,  unless  speedy 

*Laughin,  p.  155. 


336  Money  and  Banking 

action  were  taken,  their  gold  would  disappear,  and  they 
would  be  reduced  to  a  silver  standard.  Another  meeting 
of  delegates  was,  therefore,  called  and,  as  a  result,  a  sup- 
plementary treaty  went  into  force  in  1874,  by  which  the 
number  of  five-franc  pieces  to  be  minted  was  limited  in 
the  case  of  each  of  the  nations  concerned  to  a  defi- 
nitely assigned  quota.  This  policy  of  restriction  was 
adhered  to  during  the  following  three  years,  the  assigned 
quotas,  however,  being  considerably  diminished  in  1876 
and  Switzerland  refraining  from  coining  any  of  her  quota 
in  1875  ^^d  1876.  These  measures,  however,  were  not 
sufficient  to  check  the  outward  movement  of  gold,  and  in 
consequence  in  1878  the  states  of  the  Latin  Union  complete- 
ly suspended  the  coinage  of  five-franc  pieces,  and  have  ad- 
hered to  this  policy  to  the  present  day,  A  good  many 
meetings  of  delegates  have  been  held  since  1878,  but  their 
deliberations  have  been  chiefly  concerned  with  the  feasi- 
bility of  placing  the  gold  standard  on  a  still  more  secure 
basis  and  with  the  obligation  of  each  State  to  redeem  its 
own  silver  coins  in  gold  in  case  of  a  dissolution  of  the 
Union. 

7.  Bimetallism  in  the  United  States  since  1873. — Strictly 
speaking  the  currency  of  the  United  States  has  not  been  bi- 
metallic since  1873,  but  a  very  close  approach  to  bimetallism 
was  made  in  1878  and  1890.  The  chief  source  of  the  in- 
creased production  of  silver,  which  has  been  one  of  the 
causes  of  its  declining  value  during  the  last  thirty  years, 
has  been  the  rich  mines  of  our  western  states,  and  on  this 
account,  since  the  early  sixties,  very  important  private  in- 
terests in  this  country  have  been  associated  with  the  for- 
tunes of  silver.  The  principle  of  protection,  which  has  so 
long  and  so  persistently  dominated  the  policy  of  our  gov- 
ernment in  its  relation  to  private  interests,  very  naturally 


The  History  of  Bimetallism  T^yj 

encouraged  the  owners  and  others  interested  hi  these  mines 
to  seek  assistance  from  the  State  when  the  value  of  their 
product  began  to  fall  and  the  profitableness  of  their  industry 
to  decline.  They  were  greatly  aided  in  their  efforts  by  the 
people  who,  still  cherishing  the  monetary  fallacies  of  the 
greenback  period,  believed  that  the  quantity  of  money  in 
circulation  and  prosperity  were  related  to  each  other  as 
cause  to  effect  and  that  the  country  was  suffering  from  a 
scarcity  of  currency.  Most  of  our  theorists  also  believed 
in  the  doctrine  of  bimetallism,  and,  hence,  furnished  plau- 
sible arguments  for  the  more  active  partisans.  After  the 
passage  of  the  resumption  act  in  1875,  this  combination  of 
circumstances  produced  a  strong  party  in  Congress  which 
favored  a  return  to  the  bimetallic  system  by  restoring  the 
silver  dollar  to  its  status  previous  to  1873. 

It  is  not  possible  within  the  space  which  can  be  devoted 
to  the  subject  here  to  describe  even  in  outline  the  struggle 
which  ensued.  We  can  only  state  the  results.  In  1878  a 
compromise  measure  was  enacted  into  law,  known  as  the 
Bland  Act,  which  ordered  the  director  of  the  mint  each 
month  to  coin  into  silver  dollars  of  the  same  weight  and 
fineness  as  formerly  minted,  not  less  than  two  nor  more 
than  four  million  dollars  worth  of  silver  bullion,  and  which 
restored  to  these  coins  their  former  legal-tender  power. 
Being  the  result  of  a  compromise,  neither  party  was  satis- 
fied with  this  act,  but  under  it  we  resumed  specie  payments 
January  i,  1879,  and,  owing  to  a  fortunate  combination  of 
circumstances  and  devices  our  commerce  was  able  to  make 
use  of  this  constantly  increasing  mass  of  overvalued  coins, 
and  the  gold  standard  was  maintained  intact.  Lulled  into  a 
state  of  fancied  security  by  our  apparent  ability  to  absorb 
enormous  quantities  of  silver,  and  pressed  by  political  exi- 
gencies, the  party  which  had  fought  so  strenuously  against 
the  rehabilitation  of  the  silver  dollar  in  1878  consented  to  a 


338  Money  and  Banking 

still  more  liberal  measure  in  1890,  known  as  the  Sherman 
Act.  This  was  passed  as  a  substitute  for  the  Bland  law, 
and  authorized  the  Secretary  of  the  Treasury  to  purchase 
each  month  four  million  five  hundred  thousand  ounces  of 
silver  at  its  market  price  and  to  pay  for  it  in  treasury  notes 
redeemable  at  his  option  in  silver  dollars  or  in  gold.  While 
this  measure  did  not  increase  to  any  appreciable  extent  the 
amount  of  silver  dollars  in  circulation,  it  greatly  increased 
the  strain  upon  our  gold  standard  and  piled  up  an  enormous 
quantity  of  unused  silver  in  the  vaults  of  the  treasury  build- 
ing. 

The  course  of  events  which  resulted  in  the  exhaustion  of 
the  government's  gold  reserves  and  in  the  repeal  of  that 
portion  of  the  act  of  1890  which  authorized  the  purchase  of 
silver  bullion  has  been  described  in  a  previous  chapter  and 
need  not  be  repeated  here.  Suffice  it  to  say  that  since  1893 
we  have  not  added  to  our  stock  of  silver,  and  that  in  1900 
Congress  passed  an  act  which  in  many  particulars  safe- 
guards the  gold  standard  against  danger  from  this  source. 

8.  The  International  conferences. — Another  phase  of  the 
history  of  bimetallism  must  be  presented  before  the  present 
status  of  the  question  can  be  appreciated.  Four  inter- 
national conferences  and  a  number  of  others  of  less  im- 
portance have  considered  the  questions  involved  in  it,  and  a 
brief  account  of  their  deliberations  and  results  will  help  us 
to  understand  the  general  course  of  official  opinion  on  this 
question  and  the  prospects  for  the  future. 

The  first  of  these  conferences  was  held  in  Paris  in  1867 
and  was  the  result  of  a  plan  formulated  by  the  delegates  of 
the  states  of  the  Latin  Union  at  their  meeting  in  1865  to 
promote  international  uniformity  of  action  on  monetary 
matters.  The  most  significant  fact  connected  with  this  con- 
ference was  the  declaration  of  all  the  states  which  partici- 


The  History  of  Bimetallism  339 

pated,  except  Holland,  in  favor  of  the  gold  standard. 
Other  proposals  aimed  at  the  establishment  of  an  interna- 
tional unit  of  value.  In  February,  1868,  the  English  govern- 
ment appointed  a  commission  to  consider  the  proposals  of 
this  conference,  but  the  outcome  of  its  deliberations  was 
unfavorable  to  any  change  in  the  English  system,  though 
it  expressed  a  strong  appreciation  of  the  advantages  to  be 
derived  from  legislation  looking  toward  uniformity  of  in- 
ternational action.  What  happened  in  other  states  we  al- 
ready know.  Germany  adopted  the  gold  standard  in  187 1- 
73,  and  her  action  was  followed  by  the  Scandinavian  coun- 
tries, Denmark,  and  Holland.  France  and  the  other  states 
of  the  Latin  Union  discontinued  the  free  coinage  of  five- 
franc  pieces  in  1874,  and  the  United  States  dropped  the 
silver  dollar  from  the  list  of  authorized  coins  in  1873. 

The  next  conference  was  the  direct  result  of  the  fall  in 
the  value  of  silver  which  became  so  marked  in  1876  and 
which  afifected  important  interests  in  most  countries.  In 
the  United  States  the  silver  producers  of  the  west  saw  their 
profits  threatened;  in  England  the  exchanges  with  India 
were  upset,  the  business  of  the  cotton  manufacturers  of 
Lancastershire  injured,  and  investments  checked;  in  India 
the  increased  cost  of  making  the  annual  payments  due  in 
England  threatened  a  deficit  in  the  finances;  and  in  France 
and  the  other  states  of  the  Latin  Union  a  gold  famine  was 
imminent.  In  March,  1876,  the  English  government  ap- 
pointed a  commission  to  investigate  the  situation,  and  the 
Congress  of  the  United  States  took  similar  action  in  Au- 
gust of  the  same  year.  The  former  committee  made  no  pro- 
posals by  way  of  remedy,  but  presented  a  full  statement 
of  the  situation,  while  the  committee  of  Congress  reported 
in  favor  of  the  rehabilitation  of  silver,  and  started  the 
movement  which  culminated  in  the  Bland  Act.  One  clause 
of  this  authorized  the  President  to  invite  the  various  nations 


340  Money  and  Banking 

to  an  international  conference  on  the  subject,  and  the  out- 
come was  a  second  meeting  of  delegates  in  Paris,  August 
lo,  1878. 

The  attitude  of  the  representatives  of  the  various  states 
toward  bimetallism  indicated  a  considerable  change  of 
opinion  since  1867,  but  a  wide  diversity  of  interests  and 
the  impossibility  of  an  international  agreement  for  the  re- 
habilitation of  silver  at  this  time.  The  delegates  of  the 
United  States  strongly  favored  the  free  coinage  of  silver 
by  all  the  nations  at  a  ratio  to  be  agreed  upon.  Those  of 
Belgium,  Switzerland,  and  Norway  strongly  opposed  such 
action,  and  the  English  delegate  stated  that  England  would 
not  consent  to  a  modification  of  her  system.  Germany  was 
not  represented  at  all  and  France  maintained  a  waiting  at- 
titude. The  conference  adjourned  after  declaring  that  in 
view  of  the  wide  differences  of  opinion  expressed  it  was 
useless  to  discuss  the  question  of  an  international  ratio,  and 
that  each  nation  must  be  left  free  to  treat  silver  as  it  might 
think  best. 

The  advocates  of  bimetallism  were  naturally  encouraged 
over  the  trend  of  opinion  in  their  direction  since  the  con- 
ference of  1867,  and  carried  on  a  vigorous  agitation,  es- 
pecially in  the  United  States,  France  and  Germany,  This 
fact  together  with  the  continuous  decline  in  the  value  of 
silver  resulted  in  a  third  conference,  called,  on  the  joint  in- 
vitation of  France  and  the  United  States,  April  19,  1881, 
This  time  the  advocates  of  bimetallism  were  very  much 
more  numerous,  including,  besides  the  delegates  of  the  Uni- 
ted States,  those  of  France,  Italy,  Austria,  the  Netherlands, 
and  British  India.  The  representatives  of  England  and 
Germany,  however,  stated  positively  that  the  best  that  could 
be  hoped  from  their  governments  was  possible  action  with 
a  view  to  increasing  the  use  of  silver  as  money,  in  case  an 
international  agreement  for  free  coinage  were  made  by  the 


The  History  of  Bimetallism  341 

other  nations,  and  the  delegates  of  Belgium,  Switzerland, 
Greece,  and  the  Scandinavian  countries  declared  against  bi- 
metaUism.  Therefore,  in  spite  of  additions  to  the  forces 
working  for  bimetalHsm,  an  international  agreement  seemed 
as  far  away  as  ever.  This  conference  adjourned  to  meet 
again  April  12,  1882,  but  it  was  not  reassembled  until  1893. 

Agitation  in  favour  of  bimetallism  was  continued  during 
the  eleven  years,  an  international  league  having  been  formed 
for  that  purpose.  A  conference  of  bimetallists  was  held  at 
Cologne  in  October,  1882,  which  advised  Germany  to  re- 
tain the  silver  she  already  possessed,  and  to  substitute  it  in 
her  circulating  medium  for  small  gold  coins  and  paper 
below  the  denomination  of  ten  marks.  It  also  urged  the 
Bank  of  England  to  make  use  of  her  right  to  keep  a  part  of 
her  reserve  in  silver.  A  Royal  commission  on  the  depression 
of  trade,  appointed  in  England  in  1886,  reported  in  1888, 
one-half  of  its  members  favoring  and  the  other  half  op- 
posing bimetallism.  In  connection  with  the  Paris  Exposi- 
tion of  1889  a  monetary  conference  was  held,  which  closed, 
however,  without  any  practical  recommendation.  In  this 
conference  England  was  not  represented. 

The  Brussels  conference  of  1893  ^^^^  called  on  the  invi- 
tation of  the  United  States,  and  the  opinions  there  expressed 
indicate  that  the  cause  of  bimetallism  had  rapidly  lost 
ground  since  the  last  meeting  in  1881.  Even  the  Presi- 
dent's invitation  was  couched  in  language  which  was  not 
hopeful.  It  declared  the  purpose  of  the  conference  to  be  a 
consideration  of  "what  measures,  if  any,  could  be  taken  to 
increase  the  use  of  silver  in  the  currency  systems  of  na- 
tions." Though  the  delegates  of  the  United  States  pre- 
sented a  scheme  of  international  bimetallism,  they  learned  at 
the  beginning  that  it  would  be  useless  to  push  it  to  the  front, 
and  accordingly  most  of  the  time  of  the  conference  was  de- 
voted to  a  discussion  of  two  or  three  plans  submitted  for  an 


342  Money  and  Banking 

increase  in  the  use  of  silver  for  monetary  purposes  by  sub- 
stituting it  for  small  gold  coins  and  paper  of  low  denomina- 
tions at  that  time  based  on  gold.  Even  these  plans,  how- 
ever, were  rejected.  The  delegates  of  Germany,  Austria, 
and  Russia  came  to  the  conference  instructed  by  their  re- 
spective governments  not  to  vote  or  to  express  an  opinion, 
and,  though  uninstructed,  those  of  Roumania,  Portugal, 
Turkey,  and  Greece  took  the  same  attitude.  The  represen- 
tatives of  France  declared  that  their  government  would  not 
consent  to  the  free  coinage  of  silver  unless  the  other  nations 
would  do  likewise,  and  England's  attitude  was  not  materi- 
ally changed.  The  conference,  therefore,  adjourned  with- 
out any  practical  result  so  far  as  the  purpose  which  called 
the  delegates  together  was  concerned,  but  not  without  leav- 
ing upon  the  minds  of  most  people  who  watched  its  delib- 
erations the  conviction  that  the  cause  of  international  bi- 
metallism was  lost. 

9.  The  present  status  of  bimetallism. — Having  passed  in 
review  the  most  important  aspects  of  the  world's  experience 
with  bimetallism,  we  may  now  close  our  discussion  with  a 
statement  of  results,  first  of  all  regarding  the  bearing  of 
the  historical  facts  presented  upon  the  theory  of  the  sub- 
ject. 

The  crucial  point  in  the  doctrine  of  bimetallism  is  the 
supposed  adequacy  of  the  compensatory  action  of  the  double 
standard  to  prevent  a  divergence  between  the  legal  and  the 
market  ratios  of  gold  and  silver.  Upon  this  point  the  testi- 
mony of  history  is  clear.  Throughout  the  Middle  Ages  and 
early  modern  times  there  was  nearly  always  a  lack  of  uni- 
formity between  the  market  ratio  and  that  established  by 
law  in  the  various  countries,  and  during  the  nineteenth 
century,  in  spite  of  more  settled  conditions  and  a  studied 
attempt  by  governments  to  give  the  compensatory  law  an 
unobstructed  field  for  operation,  the  same  experience  has 


The  History  of  Bimetallism  343 

been  repeated.  In  order  to  maintain  the  concurrent  cir- 
culation of  the  two  metals,  one  after  the  other  every  nation 
of  Europe  and  the  United  States  has  been  compelled  to  make 
small  silver  coins  subsidiary,  and  those  which  have  attempted 
to  retain  one  silver  coin  as  standard  money  have  been 
obliged  at  first  to  limit  the  amount  coined,  and  ultimately  to 
discontinue  its  coinage  entirely.  At  the  present  time,  out- 
side of  the  silver-standard  countries,  there  is  not  a  single 
nation  which  is  regularly  minting  full  legal-tender  silver 
coins.  That  this  situation  has  been  brought  about  by  the 
force  of  economic  law,  and  in  most,  if  not  all,  cases  against 
the  will,  and  in  spite  of  the  efforts,  of  the  nations  most  con- 
cerned, is  evident  from  the  facts  presented  in  the  preceding 
pages. 

Many  people  still  believe  that  bimetallism  has  never  had 
a  fair  trial  and  that  its  establishment  upon  an  interna- 
tional basis  would  vindicate  the  claims  of  its  advocates 
regarding  the  efficacy  of  the  compensatory  law.  The  fail- 
ure of  the  experiment  made  by  the  Latin  Union  along  this 
line  is  not  regarded  by  such  people  as  a  demonstration  of  the 
futility  of  international  bimetallic  agreements,  because,  they 
say,  the  times  were  then  rendered  unpropitious  for  such  an 
experiment  by  the  action  of  Germany  in  demanding  an 
enormous  war  indemnity  in  gold  from  France  and  in  throw- 
ing upon  the  bullion  market  more  than  half  of  the  silver 
which  had  formerly  constituted  her  circulating  medium. 
It  must  be  remembered,  however,  that  the  Latin  Union  was 
compelled  to  limit  the  coinage  of  five-franc  pieces  in  1874, 
before  Germany  had  sold  silver  enough  to  affect  the  markets 
materially,  and  that  only  a  small  part  of  the  gold  which  she 
had  at  that  time  absorbed  came  from  France.  Further,  in 
judging  of  the  probable  effects  of  an  international  agree- 
ment at  the  present  time  it  must  not  be  forgotten  that  the 
market  for  the  precious  metals  was  never  so  sensitive  as 


344  Money  and  Banking 

now.  A  much  smaller  difference  in  price  than  was  for- 
merly required  will  now  cause  the  movement  of  metal  from 
one  market  to  another.  The  cost  of  transportation  is  less 
than  formerly,  and  a  much  closer  connection  between  the 
bullion  markets  of  the  world  has  been  established  by  the 
development  of  the  credit  system  in  its  various  branches 
and  especially  by  the  extension  of  international  banking. 
Moreover,  the  magnitude  of  international  credit  transac- 
tions is  so  great  that  large  quantities  of  gold  or  silver  can 
be  drawn  from  one  nation  to  another  with  comparative 
ease.  A  nation  which  should  attempt  to  establish  the  bimet- 
allic system  at  the  present  day  would  find  the  task  a  more 
difficult  one  than  it  was  twenty  or  even  ten  years  ago. 

It  is  idle  to  speculate  regarding  what  would  happen  if  all 
the  great  nations  of  the  earth  should  unite  in  the  free 
coinage  of  silver  at  a  common  ratio,  but  it  may  not  be  out 
of  place  here  to  say  that  the  probability  of  such  action  was 
never  more  remote  than  at  the  present  time.  The  results 
of  the  Brussels  Conference  were  certainly  sufficiently  dis- 
couraging to  the  bimetallists,  but  the  statistics  of  the  produc- 
tion of  gold  in  recent  times  are  even  more  so.  The  dis- 
covery of  new  mines  of  great  richness  in  South  Africa, 
Alaska,  and  the  western  part  of  the  United  States  has  so 
enlarged  the  world's  capacity  to  meet  a  growing  demand 
for  that  metal  that  the  outcry  against  an  appreciating 
standard  of  value  has  lost  its  force.  There  are  few  people 
who  would  not  prefer  a  single  to  a  double  standard,  if  the 
fear  of  falling  prices  could  be  removed.  It  is  significant  of 
the  trend  of  opinion  in  very  recent  times  that  in  1900  the 
Congress  of  the  United  States,  the  stronghold  of  bimet- 
allism for  a  quarter  of  a  century,  was  induced  to  pass  a 
law  expressly  making  gold  the  standard  of  value  in  this 
country  and  safeguarding  it  by  provisions  which,  though 
inadequate,  are  a  long  step  in  the  right  direction. 


The  History  of  Bimetallism  345 


REFERENCES 

The  literature  on  the  history  of  bimetalHsm  is  voluminous,  but  most 
of  it  is  controversial  and  fragmentary  in  character.  The  following 
books  are  general  and  cover  large  portions  of  the  entire  field :  W.  A. 
Shaw,  The  History  of  Currency,  1252  to  1894.  While  this  is  a  hard 
book  to  read,  it  is  filled  with  valuable  facts  and  observations  and  sys- 
tematically covers  the  entire  period  from  the  thirteenth  century  to 
the  last  decade  of  the  nineteenth,  and  includes  the  history  of  currency 
in  all  the  important  countries  of  continental  Europe  as  well  as  in 
England  and  the  United  States.  The  following  three  books  by  Mr. 
Ottomar  Haupt  also  contain  a  large  amount  of  historical  material  rela- 
tive to  various  countries:  IViihrungs-Politik  und  Munestatistik; 
L'Histoire  Monetaire  de  Notre  Temps;  and  The  Monetary  Question 
in  1892.  See  also  James  Marclaren,  A  Sketch  of  the  History  of  the 
Currency. 

On  the  experience  of  the  United  States  the  best  book  is  J.  Laurence 
Laughlin,  The  History  of  Bimetallism  in  the  United  States.  It  was 
first  published  in  1886,  but  it  has  been  brought  up  to  date  in  more  recent 
editions.  It  covers  the  entire  period  from  the  passage  of  the  act  of 
1792,  and  explains  in  detail  the  various  coinage  acts  which  have  been 
passed  since  that  date  and  the  influence  of  the  production  of  the 
precious  metals  and  of  the  legislation  of  European  countries  upon  our 
currency.  For  the  period  since  the  Civil  War  see  also  Noyes'  Thirty 
Years  of  American  Finance. 

The  history  of  bimetallism  in  France,  Belgium,  Switzerland,  and 
Italy  is  usually  treated  in  books  on  the  Latin  Union.  The  latest  of 
these  and  the  most  complete  is  Henry  Parker  Willis,  A  History  of  the 
Latin  Monetary  Union.  Appendix  III  of  this  book  contains  a  valuable 
bibliography.  Others  are:  L.  Bamberger,  Die  Schicksale  des  Lateini- 
schen  Milnsbundes;  and  Ad.  Burchardt-Bischofif,  Die  Lateini- 
sche  Muns-Convention  und  der  Internationale  Bimetallismus,  which, 
however,  treats  the  subject  chiefly  from  the  standpoint  of  Switzerland 
and  is  not  so  useful  as  either  of  the  others  for  the  purposes  of  most 
students.  H.  Cernuschi,  Le  grand  Proces  de  I'Union  monetaire  latine 
and  O.  Noel,  La  Question  monetaire  et  VUnion  latine  treat  of  the 
experiences  of  the  Latin  Union  itself,  especially  of  the  circumstances 
which  led  at  first  to  the  limitation  and  finally  to  the  discontinuance  of 
the  coinage  of  the  five-franc  pieces. 

On  the  statistics  of  the  production  of  the  precious  metals  and  fluc- 
tuations in  their  market  ratios  the  chief  authority  is  Soetbeer,  Edel- 
metall-Production  und  IVertverhdltnisse  von  Gold  und  Silber,  which, 
however,  brings  the  subject  down  to  the  year  1886  only.     It  should, 


34^  Money  and  Banking 

therefore,  be  supplemented  by  reference  to  the  Annual  Reports  of  the 
Directors  of  the  United  States  Mint  and  the  United  States  Bureau 
of  Statistics.  A  good  critical  discussion  of  the  statistics  which  cover 
the  period  1886-1895  may  be  found  in  Ernst  Biedermann,  Die  Statistik 
dcr  Edelmetalle,  published  in  Berlin  in  1898.  For  statistics  which 
differ  to  some  extent  from  those  of  Soetbeer  see  the  Appendices  to 
Laughlin's  history.  On  the  interpretation  of  these  statistics  and  the 
causes  of  the  changes  in  the  value  of  the  precious  metals  see,  besides  the 
references  above  given,  W.  Stanley  Jevons,  Investigations  in  Currency 
and  Finance,  chs.  ii,  iii,  and  iv;  Ernst  Seyd,  Der  Hauptirrthum  in  der 
Goldwdhrung;  W.  Jacob,  History  of  the  Precious  Metals;  J.  E.  Cairnes, 
Essays  in  Political  Economy,  chs.  i-iv;  Michel  Chevalier,  De  la  Baisse 
Probable  de  L'Or;  Helferich,  Von  den  periodischen  Schwankungen  im 
Wert  der  edeln  Metalle  von  der  Entdeckung  Amerikas  bis  sum  Jahre 
1830;  Thomas  Tooke  and  William  Newmarch,  History  of  Prices,  vols. 
V.  and  VI ;  and  R.  Hogarth  Patterson,  The  New  Golden  Age. 

On  the  international  conferences  see  the  Reports  published  by  the 
United  States  Government;  Russell,  International  Monetary  Confer- 
ences; L.  Pauliat,  La  Conference  de  1881 ;  Shaw's  history,  pp.  275-285 ; 
J.  D.  Casasus,  Le  Probleme  Monetaire  et  la  Conference  de  Bruxelles; 
and  Joh.  Phil.  Schneider,  Die  Pariser  Miins-Conferenzen  von  1878. 

Copies  of  the  various  coinage  acts  of  the  United  States  may  be  found 
in  Dunbar,  Laws  of  the  United  States  relating  to  Currency,  Finance, 
and  Banking,  in  Laws  of  the  United  States  relating  to  Loans,  Currency, 
and  Banking  published  by  the  Treasury  Department  and  in  the  Ap- 
pendices to  Laughlin's  History  of  Bimetallism.  For  translations  of 
the  legislative  acts  of  other  countries  see  the  Appendices  to  Laugh- 
lin's History  and  to  Willis's  History  of  the  Latin  Monetary  Union. 


APPENDICES 
APPENDIX  I 

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APPENDIX    II 


STATISTICAL    TABLES 

A 

Statistics  of  Production  of  the  Precious  Mbtals  * 


Gold 

Sil 

ver 

Percentage  of 

Total  for  Period 

Total  for  Period 

Production  bv 
Weisht 

Period 

Ounces  fine 

Value 

Ounces  fine 

Coining  Value 

Gold 

Silver 

Dollars 

Dollars 

1493-isao 

S, 221,160 

107,931,000 

42,309,400 

54.703.000 

II 

89 

IS2I-IS44 

5,524.656 

1 14,205,000 

69,598,320 

89,986,000 

7-4 

92.6 

1545-1560 

4,377,544 

90,492,000 

160,287,040 

207,240,000 

2-7 

97    3 

1561-1580 

4,398,120 

90,917,000 

192,578,500 

248,990,000 

2 .  3 

97-8 

I58I-I600 

4,745,340 

98,095,000 

296.352,700 

348,254,000 

1-7 

98.3 

I60I-I620 

5,478,360 

113,248,000 

271,924  700 

351,579.000 

2. 

98 

I62I-1640 

5,336,900 

110,324,000 

253,084,800 

327,221,000 

2. 1 

97.9 

I64I-I660 

5,639,110 

116,571,000 

235,530,900 

304,525,000 

2.3 

97-7 

I66I-I680 

5,954.180 

123,084,000 

216,691 ,000 

280,166,000 

2-7 

97-3 

168I-I700 

6,921,895 

143,088,000 

219,841,700 

284,240,000 

31 

96.9 

I70I-I720 

8,243,260 

170,403,000 

228,650,800 

295,629,000 

3-5 

96.5 

I72I-I740 

12,268,440 

253,611,000 

277,261,600 

358,480,000 

4-2 

95.8 

I74I-I760 

15,824,230 

327,116,000 

342,812,235 

443,232,000 

4-4 

95-6 

I761-I780 

13,313.315 

275,21 1,000 

419,711,820 

542,658,000 

31 

96.9 

I78I-I800 

11,438,970 

236,464,000 

565,235,580 

730,810,000 

2. 

98 

I80I-I8IO 

5,715,627 

118,152,000 

287,469,225 

371.677.000 

1.9 

98.1 

I8II-I830 

3,679,568 

76,063,000 

173.857,555 

224,786,000 

2.  I 

97-9 

I82I-I830 

4,570,444 

94,479,000 

148,070,040 

191,444,000 

3. 

97 

I83I-I840 

6,522,913 

134,841 ,000 

191,758,675 

247,930,000 

.Z-3 

96.7 

I84I-I850 

17,605,018 

363,928,000 

250,903,422 

342,400,000 

6.6 

93-4 

I85I-I855 

32,051,621 

662,566,000 

142,442,986 

184,169,000 

18.4 

81.6 

I856-I860 

32,431,312 

670,415,000 

145.477,142 

188,092,000 

18.2 

81.8 

I86I-I865 

29,747.913 

614,944,000 

177,009,862 

228,861,000 

14.4 

85.6 

I866-I870 

31,350,430 

648,071,000 

215,257,914 

278,313,000 

12.7 

87-3 

I87I-I875 

27.955,068 

577,883,000 

316,585,069 

409,322,000 

8.1 

91.9 

I876-I880 

27,715.550 

572,931,000 

393,878,009 

509,256,000 

6.6 

93-4 

I88I-I885 

23,973,773 

495,582,000 

460,019,722 

594,773,000 

5- 

95 

I886-I890 

27,306.441 

564,474,000 

544.557,155 

704,074,000 

4.8 

95    2 

I89I-I895 

39,412,823 

814,736,000 

787,906,656 

1,018,708,000 

4.8 

95    a 

1896 

9,783,914 

202,251 ,600 

157,061,370 

203,069,200 

5-9 

94.1 

1897 

11,420,068 

236,073,700 

160,421,082 

207,41  3,000 

6.7 

93-3 

1898 

13.863,620 

286,586,500 

173,227,864 

223,971 ,500 

7-4 

92.  6 

1899 

14,831,039 

306,584,900 

167,224,243 

216,209,100 

8.1 

91.9 

Total 

474,622,592 

9,811,321,700 

8.657,999,086 

1 1,194,174,800 

5.2 

94-8 

•  Quoted  from  the  Statistical  Abstract  of  the  United  States  for  1900,  p.  40. 

362 


Statistical  Tables 


363 


B 

Statistics  op  Coinage  in  thb  Unitbd  Statbs* 


Year 


793-1795 

796 

797 

798 

799  ■  .  .  •  . 

800 

8or 

802 

803 

804 

805 

806 

807 

808 

809 

810 

811 

812 

813 

814 

815 

8x6 

817 

818 

819 

820 

821 

822 

823 

824 

835..  ... 

826 

827 

828 

829 

830 

831 

832 

833 

834 

835 

836 

837 


Gold 


Dollars. 

71,485.00 
102,727.50 
103,422.50 
205,610.00 
213,285.00 
317,760.00 
422,570.00 
423,310.00 
258,377  50 
258,642.50 
170,367.50 
324,505.00 
437,495  00 
284,665.00 
169,375.00 
501,435.00 
497,905.00 
290,435  00 
477,140.00 

77,270.00 
3,17500 


242,940.00 

258,615.00 

1,319.030.00 

189,325.00 

88,980.00 

72,425.00 

93,200.00 

156,385.00 

92,245.00 

131,565.00 

140,145.00 

295,71750 

643,105.00 

714,270.00 

798,435  00 

978,550.00 

3,954,270.00 

2,186,175.00 

4.135,700.00 

1,148,305.00 


Silver 


Dollars. 
370,683.80 
79,077    50 

12,591-45 

330,291.00 

423,515.00 

224,296.00 

74,758.00 

58,343.00 

87,118.00 

100,340.50 

149,388.50 

471,319.00 

597,448.75 

684,300.00 

707,376.00 

638,773-50 

608,340.00 

814,029.50 

620,951.50 

561,687.50 

17,308.00 

28,575-75 

607,783.50 

1,070,454.50 

1,140,000.00 

501,680.70 

825,762.45 

805,806.50 

895,550.00 

1,752,47700 

1,564,583  00 

2,002,090.00 

2,869,200.00 

1,575,600.00 

1,994,578.00 

2,495,400.00 

3,175,600.00 

2,579,000.00 

2,759,000.00 

3,415,002.00 

3,443,003.00 

3,606,100.00 

2,096,010.00 


•Quoted   from   Laughlin's   "History  of   Bimetallism  in   the   United 
States,"  p.  249,  and  the  "  Statistical  Abstract  of  the  United  States  for  1900," 

r  44- 


364  Appendix  II 

Statistics  of  Coinage  in  the  United  States. — Continued 


Year 


Gold 


Silver 


1838 

1839 
1840 
1S41 
1842 

1843 
1844 

1845 
1846 

1847 
1848 
1849 
1850 
1851 
1852 
1853 
1854 
1855 
1856 

1857 
1858 

1859 
i860 
1861 
1862 
1863 
1864 
1865 
1866 
1867 
1868 
1869 
1870 
1871 
1872 

1873 
1874 

1875 
1876 

1877 
1878 
1879 
1880 
1881 
1882 
1883 
1884 
1885 
1886 
1887 


Dollars. 

1,809,595.00 

1,355,885.00 

1,675,302.50 

1,091,597-50 

1,834,170  00 

8,108,797.50 

5,428,230.00 

3,756,447-50 

4,034,177-50 

20,202,325.00 

3,775,51^  50 

9.007,761.50 

31,981,738.50 

62,614,492.50 

56,846,187.50 

39,377,909  00 

25,915,962.50 

29,387,968.00 

36,857,768.50 

32,214,040  00 

22,938,413.50 

14,780,570.00 

23,473,654  00 

83,395,5,30.00 

20,875,997.50 

22,445,482.00 

20,081,415.00 

28,295,107.50 

31.435,945  00 

23,828,625.00 

19,371,387-50 

17,582,987-50 

23,198,787.50 

21,032,685.00 

21,812,645  .00 

57,022,747.50 

35,254,630.00 

32,951,940.00 

46,579,452.50 

43,999,864.00 

49,786,052.00 

39,080,080.00 

62,308,279.00 

96,8so,890.oo 

65,887,685.00 

29,241,990  00 

23,991,756.50 

27,773,012.50 

28,945,542.00 

23,972, 38300 


Dollars. 

2,333,24300 

2,176,296  ,00 

1,726,703.00 

1,132,750.00 

2,332,750-00 

3,834,750.00 

2,235,550.00 

1,873,200.00 

2,558,580.00 

2, ,374,450. 00 

2,040,050.00 

2,114,950.00 

1,866,100.00 

774,397.00 

999,410.00 

9,077,571.00 

8,619,270.00 

3,501,245.00 

5,142,240.00 

5,478,760.00 

8,495,370.00 

3,284,450.00 

2,259,390.00 

3,783,740.00 

1,252,516.50 

809,267  .80 

609,917.  10 

691,005.00 

982,409.25 

908,876.25 

1,074,343.00 

1,266,143.00 

1,378,255.50 

3,104,038.30 

2,504,488.50 

4,024,747.60 

6,851,776.70 

15,347,893-00 

24,503,307-50 

28,393,045.50 

28,518,850.00 

27,569.796.00 

27.411,693 -75 
27,940,163.75 
27.973,132-00 
29,246,968.45 
28,534,866.15 
28,962,176.20 
32,086,709.90 
35,191,081.40 


Statistical  Tables 


365 


Statistics  of  Coinagb  in  thb  United  States. — Continued 


Year 


Gold 


Silver 


1888 
1889 
1890 
1891 
1892 

1893 
1894 

1895 
1896 

1897 
1898 
1899 


Dollars 
31,380,808.00 
21,413,931  00 
20,467,182.50 
29,222,005.00 
34,787.222.50 
56,997.020.00 
79,546,160.00 
59,616,357.50 
47.053,060.00 
76,028,485.00 
77,985,757  00 
111,344,220.00 


Dollars. 


33,025, 

35.496, 

39,202, 

27,518, 

12,641, 

8,802, 

9,200, 

5,698, 

23.089, 

18,487 

23.034. 
26,061, 


606.45 

683.15 
908 . 20 
856.60 
078.00 
797  30 
350.85 
010. 25 
899.05 
297  30 
033 ■ 45 
519  90 


Statistics  of  Coinage  in  France  * 


Year 

Gold 

Silver 

S  Francs 

Total 

i8o^ 

10,209,840 
38,463,980 
20,474,500 
38,533.760 
18,019,920 
32,311,260 
15,206,440 
46,070,600 
132,135.740 
97,717,880 
62,659,680 
64,544,720 
55.379.840 
15,151,280 
52,197,080 
95,410,460 
52,410,660 
28,781,080 

404,140 
4,718,100 

408,180 

7,071,700 

45,616,360 

925,540 

22,827,000 

42,303,315 

39,181,990 

22,428,245 

4,022,115 

46,911,430 

39,927,225 

51,722,400 

244,737,480 

155,228,065 

130,014,265 

60,788,535 

37,660,240 

34,183,345 

35,044,790 

12,099,695 

20,944,005 

18,061,460 

66,775,910 

98,441,395 

80,340,750 

111,572,835 

72,869,470 

88,732,310 

23,171,998.00 

1804 

47,517.195.75 

1805 

46,385,909.50 

1806 

25,241,651.50 

1807 

5,008,903.00 

1808 

67,833,922.35 

1809 

44,296,494.00 

1810 

57,170,216.50 

1811 

256,399.040.00 

1812 

181^ 

160,786,409.50 
134,900,313.50 

1814. 

61,244,121  .00 

1815 

37,673,806.00 

1816 

34,917,526.50 

1817 

1818 

37,143,579-75 
12,406,076.25 

1819 

21,235,077.25 

1820 

18,436,620.50 

1821 

67,533,866.00 

1822 

100,679,137.75 

1823 

1824. 

82,911,680.00 
114,476,007.75 

1825 

75,203,291.50 

1826 

90,835,623.00 

*  Quoted  from  Willis's  "A  History  of  the  Latin  Monetary  Union,"  pp. 
301-307. 


366  Appendix  II 

Statistics  of  Coinage  in  VRANcn.^Continued 


Year 


Gold 


Silver 


Francs 


Total 


1827 
1828 
1829 
1830 
1831 
1832 
1833 
1834 
1835 
1836 

1837 
1838 

1839 
1840 
1841 
1842 

1843 
1844 

1845 
1846 
1847 
1848 
1849 
1850 
1851 
1852 
1853 
1854 
1855 
1856 
1857 
1858 

1859 
i860 
1861 
1862 
1863 
1864 
1865 
1866 
1867 
1868 
1869 
1870 
1871 
1872 
1873 


3,160,940 

8,025,740 

1,118,180 

23,516,640 

49,641,380 

2,046,260 

16,799.780 

30,231,200 

4,550,060 

5,097,040 

2,026,740 

4,940,140 

20,670,000 

40,998,240 

12,375,060 

1,852,720 

2,826,600 

2,742,260 

119,140 

2,086,420 

7,706,020 

39,697,740 

27,109,560 

85,192,390 

269,709,570 

27,028,270 

312,964,020 

526,528,200 

447,427,820 

508,281,995 

572,561  225 

488,689,635 

702,697,790 

428,452,425 

98,216,400 

214,241,990 

210,230,640 

273,843,765 
161,886,835 
365,082,925 
198,579,510 
340,076,685 
234,186,190 
55,394,800 
50,169,880 


149,580,405 
157,130,665 

99,645,450 
118,696,115 
203,292,395 
134,305,315 
154,425,595 
211,534,020 

95,811,105 

41,518,825 
109,202,540 

86,240,080 

71,538,785 
61,305,885 
73,299,680 
65,879,910 
71,858,950 
66,975,560 
83,903,290 
42,211,015 
71,610,030 
119,052,945 
203,831,545 
80,603,390 
57,496,450 
69,951,000 
19,458,160 

53,075 
24,305,865 

45,777,405 
467,030 

133,950 
16,825 

110,490 

105,645 

108,435 

160,840 

485,670 

189,465 

54,051,560 

93,620,550 

58,264,285 

53,648,350 

4,710,905 

389,190 

154,649,045 


153.868,978.25 

161,466,133.75 

102,642,617.25 

120,187,089.75 

205,223,764  00 

141,353,91500 

157,482,86"!  .00 

218,288,384.75 

99,666,140.25 

43,242,399-25 

111,858,697.75 

88,489,324.25 

73,637,742.00 

63,795,527  00 

77,517,941  00 

68,391,170.25 

74,148,998.25 

69,1 34,980.  CX5 

89,967,609.50 

47,886,145.50 

78,285,157.00 

119,731,095  25 

206,458,663.90 

86,458,485  .  20 

59,327,308.90 

71,918,445.50 

20,099,488  .  20 

2,123,887  .20 

25,500,305.50 

54,422,214.00 

3,809,611.30 

8,665,568.70 

8,401,813.80 

8,084,198.60 

2,518,049.50 

2,519,397.70 

329,610.50 

7,296,609.90 

9,222,394.50 

44,821,409.00 

113.758,539-70 

129,445,268.00 

68,175,897.00 

69,051,256.00 

23,878,499.50 

26,838,369.50 

156,270,160.00 


Statistical  Tables 

Statistics  op  Coinage  in  France. — Continued 


367 


Year 

Gold 

Silver 

5  Francs 

ToUl 

1874 

1875 

24,319,700 
234,912,000 
176,493,160 
255,181,140 
185,318,100 

24,610,540 

59,996,010 
75,000,000 
52,661,315 
16,464,285 
1,821,420 

60,609,988 .  50 
75,000,000.00 
52,661,315.00 
16,464,285.00 
1,821,420.00 

1876 

1877 

1878 

1879 

1880 

1881 

2,167,000 
3,742.000 

6,733.445  00 
1,159.859-50 

1882 

1883 

1884 

1885 

289,400 

23,586,700 

24,668,190 

554.140 

17,477,800 

20,602,800 

17,422,020 

4.514.120 

50,943,360 

9,831,060 

108,006,930 

112,538,240 

221,379.540 

177.326,540 

38,639,490 

1886 

154.379-00 

8,910,583.00 

5,763,624.00 

370.00 

1887  .  . 

1888 

1880 

I  800 

1891  .  . 

1892 

1893 

1894. 

4,000,000.00 
8,000,000 .  00 

189s  .  . 

1 896  .  . 

i8q7  .  . 

44,000.00 

1898 

40,000,000 .  00 

1899 

14,852,874.00 

Totals, 
1803-1899  .  .  . 

9.550,127.530 

5,060,606,240 

5.601,571.998-35 

368 


Appendix  II 


D 

Surplus  of  Imports  of  Gold  and  Silver  into  British  India  * 


Years 


I835-I 

836 

I 836- I 

837 

I 837- I 

838 

1 838- 1 

839 

1839-1 

840 

1840-1 

841 

I84I-1 

842 

1842-1 

843 

1843-1 

844 

1844-1 

845 

1845-1 

846 

1846-1 

847 

1847- 

848 

1848- 

[849 

1849- 

1850 

1850- 

[851 

1851- 

1852 

1852- 

t853 

1853- 

1854 

1854- 

1855 

1855- 

1856 

1856- 

1857 

1857- 

1S58 

1858- 

1859 

1859- 

i860 

i86o- 

1 861 

i86i- 

1862 

1862- 

1863 

1863- 

1864 

1864- 

1865 

i86s- 

1866 

1866- 

1867 

1867- 

1S68 

1868- 

1869 

1869- 

1870 

1870- 

1871 

1871- 

1872 

1872- 

1873 

1873- 

1874 

1874- 

1875 

1875- 

1876 

1876- 

1877 

1877- 

1878 

1878- 

1879 

1879- 

1880 

1880- 

1 881 

1881- 

1S82 

1882- 

1883 

1883- 

18S4 

Gold 


Silver 


'  1,694.590 
2,098,620 
2,154,350 
1,294,625 

1,133,215 
686,560 
828,115 
1,055,805 
2,032,615 
3.550,500 
2,722,380 

4,234,745 
5,195,580 

6,744.590 

5,584.965 
5,766,470 
6,338,065 
5,861,505 

5,307,215 

3,656,450 

12,531,225 

10,456,070 

13,915.365 
22,132,265 
21,421,170 
21,162,845 
25.922,125 

34,240,795 
44,491.530 
49,199,820 
28,622,380 
19,211,640 

23,047,335 

25.796,760 

27,960,585 

11,410,605 

17,826,720 

13,716,810 

6,913,190 

9.367.675 

7,725.655 

1,036,750 

2,340,645 

4,480,865 

8,752,470 

18,275,995 

24,219,920 

24,654,355 

24,316,580 


5  8,059,480 

6,694,410 

9,834,720 

13,225,650 

8,252,355 

7,008,350 

6,416,140 

14,762,225 

18,477,210 

9,942,805 

4,662,450 

6,891,245 

2,470,955 

1,569,520 

6,368,035 

10,586,125 

14,326,785 

23,025,120 

11,528,720 

148,000 

40,971,875 

55,366,235 

61,094,740 
38,641,710 
55.737,815 
26,640,045 
45,432,280 
62,750,755 
63,983.595 
50,393.990 
93.343.365 
34,815,370 
27,969,805 
43,005,110 
36,601,685 
4,709,685 

32,564.135 

3,523,220 

12,256,915 

23,211,010 

7,776,775 
35,994,360 
73,381,675 
19,853,470 

39.348.715 
19,462,870 
26,895,250 

37,401,135 
32.030,765 


*  Quoted  from  Laughlin's 
States,"  pp.  252-3- 


History    of   Bimetallism  in  the   United 


Statistical  Tables 


369 


Annual  Average  Rates  of  Discount  of  the  Banks  of  France 
AND  Germany  from  1844  to   1878  * 


Date 


1844. 

1845. 
1846. 
1847. 
1848. 
1849. 
1850. 
I85I. 
1852. 

1853- 
1854. 

1855- 
1856. 

1857- 
1858. 
1859. 
i860. 
I86I. 
1862. 
1863. 
1864. 
1865. 
1866. 
1867. 
1868. 
1869. 
1870. 
I87I. 
1872. 

1873- 
1874. 

1875. 
1876. 
1877. 
1878. 


Average  rate  of  34  years. 


Bank  of  France. 

An.  Aver,  of  Min. 

Rate  Discount 


£    s. 


4 
4 
5 
4 
4 
4 
4 
3 
3 
4 
4 

5 
6 

3 
3 
3 
5 
3 
4 
6 

3 
3 
2 
2 
2 
3 
5 
5 
5 
4 
4 

3 
2 
2 


o 
o 
o 
o 
o 
o 
o 

3 
4 
6 
8 
10 

3 
14 

9 
12 
II 

IS 

13 
10 

13 
13 
14 
10 
10 

19 
14 
2 
2 
6 
o 
8 

5 
4 


o 
o 

2 
O 
O 
O 
O 

7 
9 
6 
II 
2 

3 
o 

4 

7 

I 

I 

I 

7 
II 
6 
2 
o 
o 
8 

3 
9 
10 
2 
o 
2 

3 
2 


5 


Bank  of  Germany. 

An.  Aver,  of  Min. 

Rate  Discount 


4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
5 
4 
4 
4 
4 
4 
4 
S 
4 
6 

4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 


7 

13 
16 

13 
o 
o 
o 
o 
S 
7 
I 

18 

IS 

2 

4 
o 
o 
o 

I 

6 

18 

4 
o 
o 
4 

17 
2 

5 

19 
7 
13 
3 
8 
6 


o 

7 
10 

3 
10 
o 
o 
o 
o 
S 

S 
10 

7 
7 

3 
o 
o 
o 
6 

S 
II 

s 

o 
o 
II 
7 
9 
8 

4 
8 

7 
3 
7 
9 


8      10 


♦Quoted  from  Palgrave's  "Bank  Rate  in  England,  France,  and 
Germany,",  pp.  88-91  and  98-101. 


APPENDIX   III 

THE  PAR  OF  EXCHANGE  AND  GOLD  POINTS  OF  THE  CHIEF 
CENTRES  OF  FOREIGN  EXCHANGE* 

London 


Name  of  Centre 

Par 

Gold-importing 
Point 

Gold-exporting 
Point 

Berlin 

Amsterdam 

New  York 

Paris 

20.43 

12. 107 

4.866 
25-225 

20.53 

12.17 

4.90 

25-34 

20.32 

12.03 

483 

25-I2i 

Paris 


London  .  .  . 

Berlin 

New  York  . 
Amsterdam 


25.225 
123.46 
518.26 
208.32 


25-34 
124.14 

523  05 
210. 16 


New  York 


London 
Paris .  . 
Berlin . 


4.90 

5-16 

96-25 


Bbrlin 


London  . . . 

Paris 

New  York. . 
Amsterdam 


20.43 
81 .00 

419-79 
168.74 


20.33 
80.56 

415-25 
168.25 


20.53 

81.37 
423.30 
170.50 


♦  Quoted  from  Haupt's  "  Rehabilitation  de  I'Argent,"  p.  9. 


170 


INDEX 


Accounts:  book  as  a  form  of 
credit,  95. 

Arbitrage  Business:  129. 

Associated  Banks:  of  New  York 
City,  274,  285. 

Balance  of  Trade:  121,  122. 

Balance  of  Indebtedness:  between 
communities,  121-123;  interna- 
tional,  128,   129. 

Balance  Sheet:  analysis  of  a  bank, 
147-150. 

Bank:  of  Amsterdam,  105,  106;  of 
Hamburg,  105;  of  North  Amer- 
ica, 153,  154;  of  Nuremberg,  105; 
of  Maryland,  154;  of  Massa- 
chusetts, 154,  155;  of  Provi- 
dence, 154;  of  Prussia,  258,  260; 
of  State  of  New  York,  154. 

Bank  Accounts:  analysis  of  typi- 
cal balance  sheet,   147-150. 

Bank  Acts:  Canadian,  see  Cana- 
dian Bank  Acts ;  English,  see 
English  Bank  Acts ;  French,  see 
French   Bank  Acts. 

Bank  Correspondents:  118,  119; 
as  suppliers  of  cash  to  other 
banks,  140. 

Bank  Currency:  advantages  of, 
111-115;  elasticity  of,  112-115; 
how  issued,  112,  113;  how  re- 
tired, 113,  114. 

Bankers:  private,  see  Private 
Bankers. 

Bankers'  Balances:  how  deter- 
mined, 120,  121 ;  as  an  item  of 
the  international  balance  sheet, 
130. 

Bank  fur  Handel  und  Industrie: 
267. 

Banking:  literature  on  regulation 
of,  151 ;  free  in  New  York 
State,  170-172;  free  in  western 
states,  173-175;  national,  see 
National       Banking       System ; 


state  since  the  war,  186-188; 
concentration  of  in  the  United 
States,  189;  in  Canada,  see  Can- 
ada ;  free  banking  experiment  in 
Canada,  200-202 ;  steps  toward 
the  uniform  regulation  of  in  Can- 
ada, 202-204;  relation  to  of 
British  North  American  act  of 
1867,  205-209 ;  literature  on  Can- 
adian, 219;  country  in  England, 
221-223 ;  literature  on  English, 
^37 '>  present  organization  of  the 
business  in  Germany,  270,  271 ; 
literature  on  in  Germany,  272; 
provincial  in  France,  242,  243; 
literature  on  in  France,  256; 
stages  in  the  history  of  Ger- 
man,  257;    in    Prussia,   258-260. 

Bank  Inspection  and  Supervision: 
in  United  States,  145-146;  in 
Europe,    146. 

Bank  Investments:  considerations 
governing,  134,  135 ;  notes  and 
bills  as,  135,  136;  no  fixed  rules 
regarding,  136;  bonds  and  stocks 
as,  136,  137;  difficulty  of  regu- 
lation by  law,  137;  how  restrict- 
ed   in    case    of   national    banks, 

137,    138. 

Banking  Institutions:  origm  of, 
105-108. 

Bank-notes:  form  of,  96;  as 
currency,  no;  compared  to 
deposits  as  currency  and  as 
obligation  of  banks  in; 
reserves  for  special  pro- 
tection of  holders  of,  142; 
methods  of  safeguarding,  142- 
144;  relative  advantages  and  dis- 
advantages of  different  methods 
of  safeguarding,  144.  145;  as 
rivals  of  government  notes,  182; 
how  secured  in  Canada,  216; 
limitation  on  issues  of  Bank  of 


371 


zn 


Index 


France,  246;  in  Prussia,  260; 
and  the  money  market,  281,  282. 
Bank  of  England:  origin  of,  220; 
terms  of  original  charter,  220, 
221;  branches  of,  223;  modified 
by  Peel's  act,  226;  uncovered 
note  issues  of,  226,  228;  govern- 
ment of,  230;  departments  of, 
231 ;  special  customers  of,  231, 
232 ;  its  business  with  other 
banks,  232,  233 ;  capital  and  sur- 
plus of,  233;  average  percent- 
age of  reserves  to  deposits  in, 

233-  .   . 

Bank  of  France:  origin  and  origi- 
nal constitution  of,  238,  239 ; 
modifications  effected  by  acts  of 
1803,  1806  and  1808,  239-241 ; 
experiences  of  during  Napole- 
onic regime,  241,  242;  branches 
of,  241,  243,  248,  249;  since  1848, 
245-249  ;  capital  of,  245  ;  surplus 
of,  245-246;  limit  on  note  issues 
of,  246 ;  statutes  regarding  in- 
vestments of,  246,  247;  relations 
to  the  French  Government,  247, 
248;  present  position  of,  253- 
256;  operation  of  issues  of  on 
money  market,  290,  291 ;  use  of 
five-franc  pieces  in  protection 
of  gold  reserve  by,  290,  291. 

Baytk  of  Germany:  see  Imperial 
Bank  of  Germany. 

Bank  of  the  United  States:  First, 
see  First  Bank  of  the  United 
States  ;  Second,  see  Second  Bank 
of   the   United    States. 

Bank  Rate:  definition  of,  276; 
its  influence  on  the  reserves,  280, 
281 ;  effect  of  manipulation  of 
that  of  London,  288. 

Banks:  origin  of,  105-108;  devel- 
opment of  functions  of,  106, 
107 ;  as  aeents  in  the  conduct 
of  foreign  exchanges,  107 ;  rela- 
tive importance  of  functions  of, 
107,  108;  literature  on,  115; 
earliest  in  United  States,  153- 
155;  state  in  period  1791  to  181 1, 
I57>  158;  nature  of  the  business 
of  early  state,  157, 158 ;  in  Massa- 
chusetts before  the  war,  164- 
169;  in  state  of  New  York  be- 
fore   the    war,     169-174;     state 


owned,  175-176:  state  since  the 
war,  186-188;  Joint  Stock,  see 
Joint  Stock  Banks ;  of  deposit 
in  England,  223,  224;  local  in 
France,  242,  243 ;  Prussian,  257- 
259;  mortgage  in  Germany,  267, 
268;  cooperative  in  Germany, 
268-270. 

Banks  of  Discount:  in  Germany, 
261. 

Banks  of  Issue:  in  Prussia,  260; 
German,  see  German  Banks  of 
Issue. 

Barter:  difficulties  of,  2,  3,  7-9. 

Berlin:  the  financial  center  of 
Germany,  267 ;  as  a  central  mon- 
ey market,  273. 

Berlin  Money  Market:  compared 
to  those  of  London  and  Paris, 
292 ;  as  a  free  market  for  gold, 
293 ;  how  affected  by  great  pri- 
vate banks,  293. 

Bills  of  Exchange :  definition  of, 
97;  sight,  short,  long,  bankers, 
cotton,  grain,  etc.,  97 ;  checks 
and  drafts  as,  97,  98;  as  invest- 
ments for  banks,  135,  136. 

Bimetallism:  definition  of,  296; 
essentials  of,  297,  298;  weak 
points  in  the  theory  of,  303-307; 
national  and  international,  308; 
literature  on,  309,  345  ;  in  middle 
ages,  311-315;  in  France,  318- 
223,  334-336;  in  the  United 
States,  326-330.  336-338:  inter- 
national conferences  concerning, 
338-342;  present  status  of,  342- 

344- 

Bimetallists:  objections  to  mono- 
metallic system,  299,  300. 

Bland  Act:  337. 

Bonds:  as  instruments  of  credit, 
97 ;    as    investments    for   banks, 

136,  137- 

Book  Accounts:  as  a  form  of 
credit,  95. 

Borrowing:  need  for  means  of 
borrowing  and  lending,  8  and  g. 

Brassage:   definition  of,  76. 

Canada:  epochs  in  history  of.  191, 
192;  early  economic  and  social 
conditions  in,  192-194;  the  first 
banks  in,  194-197;  influences  re- 
straining  banking    excesses    in, 


Index 


373 


197-199;  charter  provisions  of 
early  banks  of,  195-196;  bank 
acts  of  1870  and  1871,  209-211; 
of  1880,  213;  of  1890,  214-217; 
bank  failures  in,  212 ;  crisis  of 
1873  in.  212. 

Canadian  Bank  Acts:  of  1870  and 
1871,  209-211;  of  1880,  213:  of 
1890,  214-217;  of  1900,  218,  219. 

Canadian  Bankers'  Association: 
219. 

Capital:  as  a  means  of  safeguard- 
ing commercial  banking,  132 ; 
requirements  of  our  national 
banks,   132,   133;   investment  of, 

133,    134- 

Cash:  need  of  a  bank  for,  140; 
function  of  correspondents  in 
furnishing,   140. 

Centesimo :   70. 

Centime:   70. 

Central  Reserves:  274,  275;  rela- 
tion to  bank  rates,  276,  277. 

Certificates:  gold  and  silver,  81, 
82 ;  of  deposits,  96,  97. 

Chevalier,  M :  76. 

Clearing  House:  functions  of,  117; 
literature  on,  130;  London,  224. 

Coins:  definition  of,  66;  manu- 
facture of.  see  Coinage ;  influ- 
ences determining  those  which 
shall  be  minted,  71,  72;  size, 
weight  and  fineness  of,  72,  73; 
gold,  72,  73;  silver,  72,  73;  cop- 
per, 72,  73;  nickel,  72,  73; 
"sweating,"  741  clipping,  74; 
naming  and  stamping  of,  74.. 75; 
need  for  various  denominations 
of,  19  and  20;  disappearance 
from  circulation  of  undervalued, 
see  Gresham's  law ;  standard  and 
subsidiary,  28-30 ;  means  of  mak- 
ing  subsidiary,  29,  30. 

Coinage:  purpose  and  importance 
of,  66-69;  definition  of,  66;  im- 
portance of  honesty  and  accu- 
racy in  manufacture  of.  67,  68 ; 
in  middle  ages,  68;  monopoly 
of  by  government.  69. 

Compioir  d'Escompte  de  Paris: 
origin  of,  245;  history  of,  249, 
250. 

Comptoirs   d'Escompte:   242,   244, 

245- 


Conferences,  International  Mone- 
tary: 338-342. 

Cooperative  Banks:  in  Germany, 
268-270. 

Cotton  Bills:  97. 

Credit:  definition  of,  92,  93;  in- 
struments of,  see  Instruments 
of  Credit;  foundations  of,  99- 
102;  relation  to  prices,  102,  103; 
literature  on,  104;  its  relation 
to  exchange,  92;  advantages  of 
to  the  individual,  93,  94;  ad- 
vantages of  to  the  nation,  94, 
95 ;  book,  95 ;  peculiarities  in 
the  use  of  the  various  instru- 
ments of,  98,  99;  relation  of 
good  condition  of  trade  and 
character  of  debtor  to  saleabil- 
ity  of,  100,  lOi ;  its  relation  to 
money,  loi,  102;  as  a  substitute 
for  money,  103;  relations  be- 
tween communities,  122;  use  as 
a  medium  of  exchange,  11,  12. 

Credit  Fonder:  252,  253. 

Credit  Lyonnais:  origin  of,  249; 
history  of,  250,  252. 

Credit  Industriel  et  Commercial: 
origin  of,  249;  history  of,  250- 
252. 

Crises:  in  France,  241. 

Currency:  importance  of  an  ac- 
curate, convenient  and  safe,  14- 
16;  characteristics  of  a  good, 
16-18;  composition  of  modern, 
18,  19 ;  classification  of  metallic, 
19;  paper,  see  Paper  Currency; 
cost  of  shipments  of,  124,  125; 
literature  on  movements  of,  130; 
United  States  act  of  1792,  326; 
United  States  act  of  1834,  328; 
United  States  act  of  1853,  329- 

Currency  Reform:  in  England, 
315-318;  in  Germany,  331,  ZZ^. 

Decimal  System:  of  reckoning.  70. 

Demand  for  standard  of  value: 
importance  of  distinction  be- 
tween demand  for  primary  and 
secondary  standards,  50;  peculi- 
arity of  monetary,  51 ;  how  af- 
fected by  substitution  of  other 
forms  of  currency  for,  52,  53; 
magnitude  of,  how  determined, 
53,  54;  relation  of  prices  to,  54. 


374 


Index 


55 ;  arbitrary  modification  of,  55, 

56. 

Deposits:  certificates  of  deposit, 
96,  97 ;  nature  and  classification 
of  bank,  108;  as  currency,  109, 
no. 

Depreciation:  of  secondary  stand- 
ards, 35,  36,  41,  58-61. 

Deutsche  Bank:   266. 

Discontogesellschaft:  267. 

Discount  Brokerage:  as  a  special 
branch  of  banking  in  England, 
224,  225 ;  business  of  in  England, 
236,  237. 

Dollar:  United  States,  70. 

Domestic  Exchange:  literature 
on,  130. 

Double  Standard:  compensatory 
action  of,  300-303. 

Dresdner  Bank,  266. 

English  Bank  Acts:  of  1826,  222; 
of   1833,  224;   of   1844,   225-227. 

Exchange:  meaning  of  in  political 
economy,  92;  bills  of,  97,  98; 
technical  meaning  of  in  bank- 
ing parlance,  116;  rate  of,  123- 
125;  foreign,  125-130;  par  of, 
125;  sterling,  126;  importance 
of  London,  127,  128;  medium  of, 
see  Medium  of  Exchange. 

Exchanges:  local,  116,  117;  out- 
of-town,  I 17-120. 

Finance  Bills:  97. 

First  Bank  of  the  United  States: 
origin  of,  155  ;  details  of  charter, 
156,  157;  branches  of,  157. 

Florin:  Austrian,  70. 

Foreign  Exchange:  literature  on, 
130;  principles  of,  125-130. 

Franc:  French,  70. 

Frederick  The  Great:  and  the 
Bank  of  Prussia,  258;  and  the 
Seehandlungs-Sozietat,  258,  259; 
and  Prussian  land  banks,  259. 

French  Bank  Acts:  of  1800,  238, 
239;  of  1803,  1806  and  1808,  239- 
241 ;  since  1848,  245-249. 

Friedrich   d'ors:    Prussian,   74. 

George  d'ors:  English,  74. 

German  Banks  of  Issue:  early,  258, 
260 ;  relation  to  Imperial  System, 
264,  265. 

Gold:  coins  for  which  it  is  suit- 
able, 20,  72,  73;  explanation  of 


its  importance  as  a  money  metal, 
20,  21 ;  as  standard  of  value, 
40,  41;  certificates,  81,  82; 
points,  126;  import  and  export 
points,  126;  imports  and  ex- 
ports in  France,  321 ;  produc- 
tion of  after  1850,  324,  325;  in- 
creased use  of  in  Europe,  333, 

334. 

Gold  Points:  126. 

Government  Notes:  depreciation 
of  French,  41 ;  inconvertible, 
79-81 ;  convertible,  81-90 ;  dis- 
advantages of  depreciated,  79, 
80  •  Greenbacks  and  Sherman 
notes,  83 ;  their  use  during  co- 
lonial period  of  history  of 
United  States,  152,  153;  as  rivals 
of  bank  notes,  182;  in  provinces 
of  Canada  and  Nova  Scotia,  207. 

Greenbacks:  83. 

Gresham's  Law:  explanation  of, 
24-26 ;  disadvantages  of  its  oper- 
ation, 26,  27 ;  its  relation  to 
prices,  27,  28;  antiquity  of,  27 
note ;  illustrations  of  operation 
of,  26;  literature  on,  31. 

Gresham,  Sir  Thomas:  27. 

Heller:  Austrian,  70. 

Imperial  Bank  of  Germany:  origin 
of,  262 ;  definition  of  business  of, 
263,  264;  its  relation  to  the 
Empire,  264;  growth  of,  265, 
266 ;  untaxed  note-issues  of,  265, 
266. 

Incorporation:  as  a  means  of 
safeguarding  commercial  bank- 
ing. 131,  132. 

Independent  Treasury  System: 
162,  163. 

India:  as  an  absorber  of  silver, 
332. 

Instruments  of  Credit:  importance 
of  security  back  of,  99 ;  peculiari- 
ties in  the  use  of  the*  different 
varieties  of,  98,  99. 

Interest:  charges  allowed  to  banks 
by  laws  of  Canada,  218. 

Investments:  for  banks,  see  Bank 
Investments. 

Joint  Stock  Banks:  provincial  in 
England,  223 ;  of  deposit,  223, 
224;  of  issue,  227,  228;  and  con- 
centration,  229,   230;    classifica- 


Index 


375 


tion  of,  229;  functions  and  busi- 
ness of,  234,  235 ;  in  France,  238. 

Joint  Stock  Companies:  in  Ger- 
many, 260. 

Kopeck:  Russian,  70. 

Kreutzer:  Austrian,  70. 

Krone:  Austrian,  70. 

Latin  Union:  334-336. 

Law:  Gresham's,  see  Gresham's 
Law. 

Lending:  need  for  means  of  bor- 
rowing and  lending,  8,  9. 

Lira:  Italian,  70. 

Loans  and  Discounts:  the  making 
of  as  a  function  of  banking,  108, 
109. 

Lombards:  as  bankers  in  England, 
220. 

London  and  Westminster  Bank: 
224. 

London:  as  clearing  house  for 
international  commerce,  287 ; 
bank  rate  of,  280,  281,  288;  in- 
fluence of  stock  exchange  on 
money  market  of,  289. 

London  Money  Market:  how  af- 
fected by  international  com- 
merce of  London,  287;  effect  of 
manipulation  of  bank  rate  on, 
288;  its  command  over  gold 
resources  of  the  world,  289; 
how  affected  by  stock  exchange, 
289. 

London  Stock  Exchange:  and  the 
money  market,  289. 

Mark:  German,  70. 

Market  Rates:  definition  of,  276; 
classification  of  in  New  York, 
277,  278 ;  charts  showing  fluctua- 
tions of  in  New  York,  277,  278; 
classification  of  in  London,  279; 
maximum  and  minimum  in  New 
York,  284. 

Medium  of  Exchange:  definition 
of,  6;  needs  which  it  satisfies, 
7-9;  how  it  satisfies  commercial 
wants,  9-11;  importance  of  ac- 
curacy, convenience  and  safety 
in,  14-16;  characteristics  of  a 
good,  16-18;  composition  of 
modern,  18,  19;  relation  to 
standard  of  value,  13;  litera- 
ture on,  13. 


Methods  of  Reckoning:  English, 
69,  70;  decimal,  70. 

Monetary  Conference:  Paris,  338, 
339;  Brussels,  341,  342. 

Money  Markets:  central,  273,  274; 
New  York,  see  New  York 
Money  Market;  London,  see 
London  Money  Market;  Paris, 
see  Paris  Money  Market; 
Berlin,  see  Berlin  Money  Mar- 
ket. 

Money:  two  functions  of,  i ;  in- 
definite meaning  of  term,  i ;  con- 
current circulation  of  paper  and 
metallic,  30-31;  See  also  Cur- 
rency, Medium  of  Exchange, 
and  Standard  of  Value. 

Monometallism:  definition  of,  296; 
arraignment  of  by  bimetallists, 
299,  300. 

Mortgage  Banks:  in  Germany, 
267,  268. 

Napoleons:  French,  74. 

National  Bank  fur  Deutschland: 
266. 

National  Banking  System:  origin 
of,  176,  177;  act  of  1863  con- 
cerning, 177-179;  slow  progress 
of  in  early  years,  179,  180;  act 
of  1864  concerning,  179,  180; 
act  of  1870,  1874  and  1875  con- 
cerning, 181 ;  defect  of  bond  se- 
curity feature,  183;  its  merits, 
183,  184;  relation  of  deposit 
banking  to  success  of,  185. 

National  Banks:  decline  in  circu- 
lation of  in  period  1875  to  1879, 
183. 

National  Discount  Company:  22^5. 

New  York  City:  as  a  central 
money  market,  273. 

New  York  Money  Market:  effect 
on  of  inelastic  note  issues,  283, 
284;  how  affected  by  Independ- 
ent Treasury  System,  283;  fluc- 
tuations of  rates  on,  284 ;  neglect 
of  public  interests  on,  285;  ef- 
fect of  greenbacks  on,  285,  286; 
effect  on  of  mass  of  silver 
dollars,  286. 

Notes:  Government,  see  Govern- 
ment Notes;  Treasury,  see 
Treasury  Notes ;  bank,  see  Bank 
Notes;    promissory,   as   invest- 


Zl^ 


Index 


ments  for  banks,  96,  135,  136; 
provincial  in  Canada,  204,  205. 

Paper  Currency:  classification  of, 
19;  utility  of,  21-23;  secret  of 
its  circulation,  11,  12;  inexpen- 
siveness  of,  22 ;  superiority  of 
in  respect  to  convenience  and 
safety,  23,  24;  elasticity  of,  23, 
24. 

Paris:  as  a  central  money  market, 

272- 

Paris  Money  Market:  how  affected 
by  issues  of  Bank  of  France, 
290;  protection  of  gold  supply 
on,  290,  291 ;  stability  of  rates 
on,  292. 

Par  of  Exchange:  125. 

Pfennig:   German,  70. 

Prices:  definition  of,  32;  relation 
of  standard  of  value  to,  33,  34; 
interpretation  of,  46-49;  statis- 
tics of,  47-49;  interpretation  of 
average,  47.  48;  how  related  to 
demand  for  standard  com- 
modity, 54,  55 ;  relative  as  in- 
fluenced by  currency  movements, 
123. 

Private  Bankers:  in  England,  221, 
222,  224;  diminution  in  number 
of  English,  227,  228 ;  functions  of 
English,  235,  236. 

Quantity  Theory:  explanation  of, 
61-63;  criticism  of,  63-65;  litera- 
ture on,  65. 

Rate  of  Exchange:  domestic,  123- 
125;  foreign,  125-130;  relation 
to  of  costs  of  shipments  of  cur- 
rency, 124;  differences  between 
on  different  classes  of  bills,  126, 
127. 

Rates:  Bank,  see  Bank  Rates; 
market,  see  Market  Rates.  _ 

Ratio  between  Gold  and  Silver: 
in  1803-1893,  319;  causes  of  fluc- 
tuations in,  323,  324. 

Redemption  Fund:  for  bank  circu- 
lation in  Canada,  216. 

Reserves:  regulation  of,  138-141 ; 
seasonal  variation  in,  139;  how 
related  to  demand  for  hand-to- 
hand  money,  139,  140;  regula- 
tions concerning  imposed  by 
national  banking  act,  140,  141 ; 
objections  to  legal  regulation  of, 


141;  central,  see  Central  Re- 
serves. 

Resumption  of  Specie  Payments: 
act  of  1875  concerning,   180. 

Revolution:  of  1830  in  France, 
242;  of  1848  in  France,  243-245. 

Ruble:  Russian,  70. 

Safety-Fund:  as  a  method  of  pro- 
tecting holders  of  bank  notes, 
142,  143;  experience  with  in 
New  York  State,  169-171 ;  Cana- 
dian, 216. 

Saving:   means  for  promoting,  8. 

Second  United  States  Bank:  its 
charter  compared  to  that  of 
First,  160;  branches,  161;  de- 
feat of  bill  for  recharter  of,  161, 
162. 

Seehandlungs  Sozietdt,  258,  259. 

Seniorage:  definition  of,  75;  argu- 
ments for  and  against,  77,  78. 

Sherman  Act:  338. 

Sherman  Notes:  83. 

Shortt,  Adam:  192,  196. 

Silver:  coins  for  which  it  is  suit- 
able, 20;  explanation  of  its  im- 
portance as  a  money-metal,  20, 
21;  certificates,  81,  82;  imports 
and  exports  of  in  France,  320; 
fall  in  value  of  after  1875,  330- 
334;  production  of  after  1865, 
331;  sale  of  by  Germany,  331, 
332;  limitation  of  monetary  use 

of,  332,  333- 

Societe  Gcnerale:  origin  of,  249; 
history  of,  250-252. 

Specie  Payments:  resumption  of 
in  United  States,  180;  suspen- 
sion of  in  1814,  159;  resumption 
of  aided  by  United  States  Bank, 
169. 

Standard  of  Value:  definition  of, 
2;  functions  of,  2-6;  capacity 
to  serve  as,  6;  relation  to  medi- 
um of  exchange,  13;  literature 
on,  13,  49 ;  relation  to  prices,  2)3> 
34;  distinction  between  primary 
and  secondary,  34-37 ;  character- 
istic features  of,  37*40;  history 
of,  40-43 ;  importance  of  stabil- 
ity of  value  of,  43-46;  difficulty 
of  securing  stable  standard  of 
value,  46 ;  serviceability  as  medi- 
um of  exchange,  38,  39;  impor- 


Index 


377 


tance  of  high  degree  of  utility 
for  purposes  of  ordinary  con- 
sumption, 2)7 y  38;  depreciation 
of  secondary.  35,  36,  41,  58-61 ; 
relation  to  debts,  45-46;  value 
of,  50-65 ;  demand  for,  see  De- 
mand for  Standard  of  Value; 
supply  of,  see  Supply  of  Standard 
of  Value;  secondary,  58-61. 

Stockholders:  double  liability  of, 
134,  197,  210. 

Stocks:  as  investments  for  banks, 
136,  137- 

Sub-treasury:  New  York,  274. 

Suffolk  Bank  System:  167-169. 

Supply  of  Standard  of  Value: 
definition  of,  56,  57;  effect  of 
durability  of  the  precious  metals 

on,  57,  58- 

Surplus:  accumulation  of  as  a 
means  of  safeguarding  com- 
mercial banking,  133;  require- 
ment of  national  banks,  133; 
investment  of,  133.  134;  of  Bank 
of  France,  245,  246. 

Thaler s:  German,  299  note. 

Treasury  Notes:  convertible,  82- 
90;  Greenbacks  and  Sherman 
Notes,  83;  their  defects  as  cur- 
rency,   83-90;    contrasted    with 


gold  and  silver  certificates,  83; 
their  lack  of  elasticity,  84;  pos- 
sible expensiveness,  85-87 ; 
United  States  experience  with, 
87,  88;  comparison  with  sub- 
sidiary coin,  89;  literature  on, 
90,  91. 

Trust  Companies:  functions  of, 
188;  their  development  in  the 
United  States,  188,  189;  litera- 
ture on,  190. 

Unit  of  Value:  definition  of,  32; 
its  relation  to  prices,  32,  33; 
weight  of  in  United  States,  32; 
history  of,  42,  43;  need  not  be 
tance  of  certainty  of  in  the  medi- 
ferent  countries,  70-72;  deter- 
mination of  size  of,  70,  71. 

Value:  language  of,  2-6;  impor- 
tance of  certainty  of  in  the  medi- 
um of  exchange,  18;  standard 
of,  see  Standard  of  Value;  unit 
of,  see  Unit  of  Value;  stability 
of  in  the  standard,  43-46;  quan- 
tity theory  of,  see  Quantity 
Theory. 

Wealth:  need  for  means  of  ac- 
cumulating, 8;  saleability  of  in 
its  relation  to  credit,  100. 


FAC/Liry 


546  553 


